Tariff Pressures And Leadership Shifts Will Shape Municipal Repair Prospects

Key Takeaways

• Executive leadership changes and reliance on acquisitions introduce uncertainty, potentially impacting revenue growth, operational efficiency, and profit margins.
  
• Rising tariffs, product costs, and dependency on variable municipal funding may erode gross margins and dampen anticipated growth rates.
  
• Core & Main's strategic focus and acquisitions drive stable growth, leveraging a fragmented market for expansion and maintaining financial strength for future earnings.

Catalysts

Distributes water, wastewater, storm drainage, and fire protection products and related services in the United States.

• The transition in executive leadership introduces some uncertainty, which could hinder smooth strategic execution in the near term, impacting Core & Main's revenue growth and operational efficiency.
  
• Tariffs and product costs are expected to rise, influencing pricing strategies and potentially eroding gross margins if costs cannot be offset through customer pricing adjustments.
  
• Although municipal spending stability is highlighted, significant portions of project funding depend on variable local revenue streams, which might not sustain anticipated growth rates, leading to potentially lower revenue growth.
  
• The dependency on acquisitions for growth poses a risk, as the market may become more competitive or deals more expensive, potentially affecting Core & Main's ability to deliver accretive growth and maintain profit margins.
  
• A declining backlog in non-residential construction and anticipated modest growth in municipal demand may not offset the potential slowdown in residential lot development, potentially leading to weaker-than-expected revenue contributions from these sectors.

Core & Main Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Core & Main compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Core & Main's revenue will grow by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.5% today to 7.1% in 3 years time.
• The bearish analysts expect earnings to reach $594.1 million (and earnings per share of $3.33) by about August 2028, up from $416.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, down from 29.2x today. This future PE is lower than the current PE for the US Trade Distributors industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.36%, as per the Simply Wall St company report.

Core & Main Future Earnings Per Share Growth

Risks

• Core & Main's strategic focus on municipal repair and replacement activities provides a stable foundation, contributing to consistent revenue growth as municipal spending on water infrastructure is expected to grow due to aging systems and environmental challenges.
  
• The company reported an 18% sales growth in the fourth quarter with robust gross margins, indicating strong revenue momentum and financial performance despite market uncertainties.
  
• Core & Main estimates only a 19% market share in a fragmented $39 billion addressable market, suggesting significant potential for revenue growth through market share gains.
  
• The acquisition strategy has added over $600 million in annual sales and presents further opportunities for revenue growth and margin expansion through integrating and scaling acquired businesses.
  
• With a flexible balance sheet, Core & Main has demonstrated strong cash flow generation, allowing for ongoing capital reinvestment and shareholder returns, which supports future earnings growth.

Valuation

• The assumed bearish price target for Core & Main is $46.66, which represents two standard deviations below the consensus price target of $64.5. This valuation is based on what can be assumed as the expectations of Core & Main's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $77.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $8.4 billion, earnings will come to $594.1 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 8.4%.
• Given the current share price of $64.12, the bearish analyst price target of $46.66 is 37.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.