Infrastructure Act And Advanced Metering Solutions Propel Water Sector Growth

Key Takeaways

• Strategic expansions and acquisitions aim to boost organic revenue growth, margins, and earnings through market, product, and geographic diversification.
  
• Asset-light business model enhances cash flow conversion, supporting reinvestment and share repurchases to boost shareholder value.
  
• Environmental and economic challenges, integration risks, competition, material price changes, and economic conditions pose threats to Core & Main's market position and profitability.

Catalysts

Distributes water, wastewater, storm drainage, and fire protection products and related services to municipalities, private water companies, and professional contractors in the municipal, non-residential, and residential end markets in the United States.

• Core & Main expects to capitalize on strong secular growth trends in the water sector, driven by investments from the Infrastructure Investment and Jobs Act, which could significantly boost long-term revenue prospects.
  
• The ongoing efforts to expand product offerings and geographic coverage, including the opening of new locations and involvement in advanced metering solutions, are set to drive organic revenue growth and potentially higher margins.
  
• Recent acquisitions are anticipated to contribute positively to revenue and expand markets, with their integration expected to create synergies that could enhance earnings and operational efficiencies.
  
• Strategic initiatives around expanding private label products and optimizing sourcing strategies are expected to support gross margin expansion, contributing positively to net margins.
  
• The company's asset-light business model, enabling a high conversion of EBITDA to cash flow, supports reinvestment into growth initiatives and share repurchases, potentially increasing future earnings and shareholder value.

Core & Main Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Core & Main's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $639.2 million (and earnings per share of $3.25) by about January 2028, up from $410.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 26.3x today. This future PE is greater than the current PE for the US Trade Distributors industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Core & Main Future Earnings Per Share Growth

Risks

• The growing disparity between water supply and demand due to environmental, demographic, and economic factors presents a risk to Core & Main's core market. Without significant efforts to improve water conservation and infrastructure, this issue could impact future revenue growth from the water sector.
  
• The integration of new acquisitions involves aligning diverse systems, operations, and cultures, which could pose significant operational risks and lead to unexpected costs, thus impacting net margins and overall earnings.
  
• Increased competition from hundreds of local and regional distributors could put pressure on Core & Main's market share, potentially affecting revenue and net income if the company cannot maintain its competitive edge.
  
• The expectation for gross margin normalization and the potential for price deflation in materials like steel and PVC could lead to margin compression, negatively impacting profitability.
  
• Economic conditions, including interest rate movements and the pace of federal infrastructure funding, could influence construction activity, which is crucial for Core & Main's growth. Any downturn could lead to lower-than-expected industrial end market growth, affecting projected revenues and EBITDA.

Valuation

• The analysts have a consensus price target of $60.92 for Core & Main based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $76.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.6 billion, earnings will come to $639.2 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 7.4%.
• Given the current share price of $56.73, the analyst's price target of $60.92 is 6.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.