Executive Summary / Key Takeaways

• Core & Main is a leading specialty distributor poised to capitalize on the critical need to upgrade aging U.S. water infrastructure, operating in a fragmented $39 billion addressable market where it holds an estimated 19-20% share.
• The company's differentiated value proposition combines a vast local distribution network with national scale, specialized product expertise (including advanced metering and treatment plant solutions), and value-added services, enabling it to outperform end markets and capture share.
• Recent financial performance, highlighted by record Q1 2025 net sales of $1.91 billion (up 9.8% year-over-year) and Adjusted EBITDA of $224 million (up 3.2%), demonstrates resilience and growth driven by organic initiatives and strategic acquisitions.
• Core & Main is actively pursuing growth through greenfield expansions (targeting 5-10 new locations in 2025) and a robust M&A pipeline, having completed 10 acquisitions in fiscal 2024 to expand geography, product lines, and capabilities, including entry into the Canadian market.
• Management reaffirmed its fiscal year 2025 guidance, projecting net sales of $7.6 billion to $7.8 billion and Adjusted EBITDA of $950 million to $1 billion, underpinned by expectations for roughly flat end markets, flat to positive pricing, and 2-4 points of above-market organic volume growth.

Building the Foundation: Addressing a Critical Infrastructure Imperative

Core & Main, Inc. (CNM) operates at the nexus of a fundamental societal need: reliable water infrastructure. As a leading specialty distributor of water, wastewater, storm drainage, and fire protection products and services, the company plays a vital role in the maintenance, repair, replacement, and construction of these essential systems across the United States. Its customer base is diversified, spanning municipalities, private water companies, and professional contractors serving municipal, non-residential, and residential end markets. This balanced exposure, particularly the significant portion derived from stable, non-discretionary municipal demand (approximately 42% of fiscal 2024 sales), provides a resilient foundation for the business.

The urgency of Core & Main's mission is underscored by the deteriorating state of U.S. water infrastructure. Data indicates that in 2023, 20% of water mains across the U.S. and Canada were beyond their useful lives, contributing to an estimated 260,000 water main breaks annually and the loss of 2.1 trillion gallons of water each year from leaky pipes. This critical need for investment is a key secular driver for the industry, supplemented by population growth, increasing regulatory demands, and initiatives like the Infrastructure Investment and Jobs Act (IIJA), which allocates $55 billion for water infrastructure improvements. While the flow of IIJA funds has been gradual (approximately a third allocated to states, ~10% to specific projects as of Q3 2024), it represents a significant long-term tailwind.

Operating within a highly fragmented $39 billion addressable market, Core & Main stands out as one of only two national distributors. Despite its leadership position, the company estimates it holds just 19-20% market share, highlighting a substantial runway for growth through both organic initiatives and strategic acquisitions. The competitive landscape includes other national players like Xylem Inc. (XYL), Mueller Water Products, Inc. (MWA), Pentair plc (PNR), and Badger Meter, Inc. (BMI), as well as hundreds of local and regional distributors.

Core & Main differentiates itself by combining national scale with deep local expertise across its network of approximately 370 branches in 49 states. This local presence is crucial in an industry where familiarity with municipal specifications and strong customer relationships are paramount. The company's strategic approach is rooted in a "people first culture," fostering an entrepreneurial mindset at the local level while leveraging national resources for supply chain optimization, project management, and value engineering on complex projects like data centers.

Technological Edge and Specialized Offerings

A key component of Core & Main's competitive moat lies in its specialized product offerings and integrated service capabilities, particularly in areas benefiting from technological advancements. While not a manufacturer of foundational technologies like Xylem's pumps or Badger Meter's sensors, Core & Main excels in distributing, integrating, and supporting these solutions, providing a crucial link between suppliers and end-users.

The company's "smart utility strategy" is a prime example. Recognizing that many municipalities still rely on outdated manual read (~1/3) or drive-by (~1/3) water meters, Core & Main has become a leading provider of Advanced Metering Solutions (AMS). These systems automatically and wirelessly transmit real-time water usage data, offering tangible benefits like improved billing accuracy, reduced labor costs, and proactive leak detection. Core & Main's value proposition extends beyond hardware distribution to include turnkey project management, installation, and software integration services. This comprehensive offering enables the company to win large metering contracts that manufacturers might otherwise pursue directly. The success of this initiative is evident in its performance, with AMS sales growing 48% in Q2 2024, 24% in Q3 2024, and contributing to 9.9% growth in Meter Products sales in Q1 2025. This focus has resulted in a 9% net sales CAGR for meter products over the last decade.

Beyond metering, Core & Main is expanding its presence "inside the fence" of water and wastewater treatment plants. This involves distributing specifically engineered products, including specialty valves and equipment, leveraging investments in key talent with knowledge of treatment plant specifications and funding processes. The company also offers specialized piping solutions like fusible high-density polyethylene (HDPE) and products for storm drainage (including geosynthetics and erosion control), which saw 16.6% growth in Q1 2025. These product initiatives collectively represent a significant portion of the business, delivering approximately $2.5 billion in combined annual net sales and averaging 13% annual growth over the last 10 years.

Compared to competitors, Core & Main's strength lies less in proprietary hardware technology and more in its distribution efficiency, service integration, and ability to drive adoption of advanced products across a fragmented customer base. While a company like Xylem may lead in R&D for pumps or digital platforms, Core & Main's extensive branch network allows for faster delivery (potentially 10-15% faster project turnaround) and on-site support, which is critical for complex installations like smart meters or treatment plant components. This service-oriented approach, combined with a focus on cost efficiency in its distribution model, provides a distinct competitive advantage, particularly in capturing market share from smaller regional players.

Financial Performance and Strategic Execution

Core & Main has demonstrated a strong track record of growth and profitability, particularly since becoming an independent company in 2017, achieving a 15% average annual sales growth rate over that period. Fiscal year 2024 marked the company's 15th consecutive year of positive sales growth, reaching a record $7.44 billion, an 11% increase year-over-year. This growth was primarily fueled by strategic acquisitions (contributing 9 points) and organic market share gains (a couple of hundred basis points above the roughly flat end markets), supplemented by a 53rd selling week. Adjusted EBITDA for fiscal 2024 was $930 million, representing a 12.5% margin.

The first quarter of fiscal year 2025 continued this positive momentum, with net sales reaching an all-time high for the period at $1.91 billion, a 9.8% increase compared to the prior year quarter. This growth was driven by higher volumes and the contribution from recent acquisitions. Organic sales grew mid-single digits, reflecting continued share gains. Gross profit increased 9.0% to $510 million, resulting in a gross margin of 26.7%. While slightly down year-over-year (from 26.9%), this reflects a higher average cost of inventory compared to the prior year, partially offset by the benefits of gross margin initiatives (private label, sourcing, pricing) and accretive acquisitions. Selling, general, and administrative expenses increased 14% to $293 million, primarily due to acquisitions and inflation, though organic SG&A (excluding acquisitions and equity-based compensation) was up a more modest 4%, indicating underlying productivity gains. Operating income grew 1.8% to $171 million. Interest expense decreased to $30 million, benefiting from lower average borrowings on the ABL and decreased variable interest rates. Net income attributable to Core Main, Inc. increased 5.3% to $100 million, resulting in diluted EPS of $0.52. Adjusted EBITDA for the quarter was $224 million, up 3.2%, with an Adjusted EBITDA margin of 11.7%.

The company's asset-light distribution model supports strong cash flow generation. In fiscal 2024, Core & Main generated over $620 million in operating cash flow, converting over 65% of Adjusted EBITDA. This robust cash generation provides significant capital for strategic deployment. In fiscal 2024, the company invested $741 million in 10 acquisitions and returned $176 million to shareholders through share repurchases. In Q1 2025, operating cash flow was $77 million, a positive result for a seasonally lower cash quarter.

The company also repurchased $39 million of Class A common stock in Q1 2025 at an average price of $46.64, citing an attractive valuation.

As of May 4, 2025, the company had $8 million in cash and $1.1 billion in total liquidity, with $100 million outstanding on its Senior ABL Credit Facility and approximately $1135 million available. Net debt stood at nearly $2.3 billion, resulting in a net leverage ratio of 2.4x, within the company's target range of 1.5 to 3 turns.

Outlook and Growth Trajectory

Core & Main's management remains confident in the company's growth prospects and reaffirmed its full-year fiscal 2025 guidance. The company expects net sales to be in the range of $7.6 billion to $7.8 billion and Adjusted EBITDA between $950 million and $1 billion. This outlook implies Adjusted EBITDA margins in the range of 12.5% to 12.8%.

The guidance is based on several key assumptions. Management anticipates overall end markets to be roughly flat for the full year, with a stronger first half and a slight moderation in the back half due to potential macroeconomic uncertainties related to tariffs, inflation, and interest rates impacting private construction. Municipal repair and replacement activity is expected to show modest growth. Pricing is projected to be flat or better for the year, reflecting sequential improvements and the ability to pass through cost changes. A significant driver of the expected growth is the company's ability to achieve 2 to 4 points of above-market organic volume growth through its strategic initiatives. This includes expanding its footprint through greenfields (with plans to open 5-10 new locations in 2025), driving the adoption of specialized products (meters, treatment plant, HDPE), and developing its sales talent. The guidance also incorporates approximately 2 points of growth from acquisitions already completed in fiscal 2024.

The company's M&A pipeline remains active, with a focus on identifying and integrating complementary businesses that expand geographic reach, add product lines, or enhance capabilities. The 10 acquisitions completed in fiscal 2024, including entry into the Canadian market via HM Pipe Products, added approximately $620 million in annualized net sales and are expected to contribute to future growth.

Core & Main is also focused on sustainable margin expansion. Management expects to improve gross margins in fiscal 2025 through the continued execution of private label, sourcing optimization, and pricing initiatives. While SG&A growth has recently outpaced sales due to acquisitions, the company anticipates organic productivity gains and cost-out activities to drive improvements through the end of the year, supporting the targeted EBITDA margin range.

Risks and Considerations

While the outlook is positive, investors should consider several potential risks. Macroeconomic factors, including fluctuations in interest rates, inflation, and potential changes in trade policies (tariffs), could impact construction activity and customer sentiment, particularly in the residential and non-residential sectors. Although the IIJA provides a long-term tailwind, delays in the appropriation and disbursement of federal funds could affect the timing of municipal projects.

The fragmented and competitive nature of the industry means Core & Main faces ongoing pressure on pricing and market share from both national and local players. While the company's scale and service model provide advantages, competitors like Xylem and Mueller Water Products possess their own strengths in technology and product durability. Supply chain disruptions and price volatility in key product costs (like PVC or steel pipe) could impact gross margins if the company is unable to pass through cost changes effectively.

Acquisition integration carries inherent risks, including the ability to successfully combine operations, retain key personnel, and realize anticipated synergies. The company is also exposed to product liability and warranty claims, including ongoing asbestos-related litigation, which could result in significant costs. Finally, the company's variable rate debt exposes it to interest rate risk, although this is partially mitigated by interest rate swaps.

Conclusion

Core & Main is strategically positioned to benefit from the undeniable need to modernize and expand aging water infrastructure across North America. The company's core strength lies in its expansive local distribution network, complemented by national scale, a diversified product portfolio including specialized and technologically advanced solutions, and a service-oriented approach that differentiates it in a fragmented market. Recent financial results demonstrate solid growth driven by effective execution of both organic initiatives and a robust M&A strategy.

With a clear outlook for fiscal 2025 projecting continued sales and EBITDA growth, supported by resilient municipal demand, anticipated market share gains, and ongoing margin enhancement efforts, Core & Main presents a compelling investment thesis. While macroeconomic uncertainties and competitive pressures exist, the company's proven ability to generate strong cash flow provides the flexibility to invest in future growth and return capital to shareholders. The long-term secular tailwinds in water infrastructure, coupled with Core & Main's strategic positioning and operational capabilities, suggest a favorable trajectory for the business.