New Locations And Acquisitions Will Extend Geographic Reach

Key Takeaways

• Strategic expansions and M&A activities are expected to enhance revenue, geographical reach, and market share in the fragmented industry.
  
• Diversification into private labels and municipal infrastructure spending drives margin growth and revenue stability.
  
• Leadership changes, tariffs, interest expense increases, price pressures, and potential economic slowdowns pose risks to revenue growth, operational efficiency, and gross margins.

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's strategy includes significant expansion efforts, such as opening new locations and acquiring complementary businesses, contributing to a wider geographical reach and product offering, likely enhancing future revenue growth.
  
• Continued investment in private label products, anticipated to rise from 4% to over 10% of sales, is expected to drive gross margin expansion, as private labels typically yield higher margins than branded products.
  
• Municipal water infrastructure spending, which comprises over 40% of their sales, shows a strong growth trajectory due to the need to update aging systems and comply with environmental standards, ensuring consistent revenue and stability.
  
• A focused M&A strategy with a pipeline of potential deals is expected to grow market share in the highly fragmented industry, supporting both revenue growth and operational efficiencies leading to improved net margins.
  
• Core & Main anticipates generating strong operating cash flows, enabling further investment in organic growth and M&A, in addition to returning capital to shareholders through share repurchases, positively impacting earnings per share.

Core & Main Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Core & Main's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 7.2% in 3 years time.
• Analysts expect earnings to reach $614.0 million (and earnings per share of $3.04) by about April 2028, up from $411.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $551 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, down from 24.5x today. This future PE is greater than the current PE for the US Trade Distributors industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 1.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Core & Main Future Earnings Per Share Growth

Risks

• Executive leadership changes and transitions, such as the CEO moving to an executive chair role, could disrupt strategic execution and may negatively impact revenue growth and operational efficiency.
  
• Exposure to tariffs, although currently deemed neutral, poses uncertainty that could lead to rising product costs, impacting gross margins and net earnings if tariffs substantially affect key imported components.
  
• Variable interest expenses have increased from previous years due to higher borrowings, leading to higher financial costs that could pressure net income if not managed effectively.
  
• Price pressures in product categories such as steel and potentially other noncommodity products may negatively impact gross margins if cost increases cannot be passed on to customers.
  
• A potential economic slowdown or volatile interest rate environment could dampen construction activity in both residential and nonresidential sectors, leading to weaker-than-expected sales growth and revenue.

Valuation

• The analysts have a consensus price target of $59.79 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 $77.0, 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 $614.0 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $52.94, the analyst price target of $59.79 is 11.5% higher.
• 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.