Core & Main (CNM): Navigating Cost Pressures with Margin Resilience and Water Infrastructure Growth Momentum

Core & Main (NYSE: CNM), a specialist distributor of water infrastructure products, delivered a robust Q1 2025 performance, underscored by 10% revenue growth to $1.911 billion. The results reflect the company's strategic focus on margin initiatives and balance sheet discipline, even as it navigates macroeconomic headwinds. With secular tailwinds from U.S. water infrastructure modernization, CNM's positioning as a critical supplier to municipalities and contractors positions it to capitalize on a $1 trillion market opportunity over the next decade. This article argues that CNM's equity remains undervalued, offering a compelling risk-reward profile for investors ahead of its upcoming earnings call.

Margin Resilience Amid Inflationary Pressures

CNM's Q1 gross profit rose 9% to $510 million, though its adjusted EBITDA margin dipped to 11.7% from 12.5% in Q1 2024. The contraction stemmed from seasonal working capital demands and lingering inventory costs from prior inflationary periods. However, management emphasized that margin-enhancement strategies—such as product line expansions, operational efficiencies, and disciplined acquisitions—are on track to restore margins to the 12.5-12.8% range by fiscal year-end.

The company's inventory management stands out: it has reduced reliance on excess stock accumulated during 2022-2023 inflation spikes, while focusing on high-margin private-label products and niche offerings like smart metering systems. Meanwhile, its sales talent development program—supporting over 600 field reps with an average tenure of 14 years—has bolstered customer retention and cross-selling opportunities.

The stock's 5.19% premarket surge after Q1 results underscores investor confidence in these initiatives. Despite near-term margin pressures, CNM's reaffirmed full-year guidance (net sales of $7.6–7.8 billion and EBITDA of $950–1.0 billion) signals confidence in its ability to sustain momentum.

Balance Sheet: Leverage Managed, Liquidity Strong

CNM's net debt rose to $2.276 billion as of Q1 2025, reflecting share repurchases ($39 million in the quarter) and acquisitions. Yet its liquidity remains robust, with $993 million in borrowing capacity under its credit facility. The net debt leverage ratio, at 2.7x (as of April 2024), is manageable for a growth-oriented distributor.

Management has prioritized capital allocation to three pillars: acquisitions (contributing $1.8 billion in annual sales since 2017), share buybacks, and debt reduction. This discipline aligns with CNM's long-term strategy to balance growth and financial stability. The company's ability to maintain a strong balance sheet even during macroeconomic uncertainty positions it to capitalize on acquisition opportunities and outperform peers in cyclical downturns.

Strategic Positioning: Water Infrastructure's Undisputed Leader

CNM's dominance in water infrastructure is unmatched. With 370 branches across 49 states, it serves 60,000+ customers, including municipalities addressing aging pipelines and stormwater systems. Its product portfolio—225,000 items including pipes, valves, and smart technologies—enables it to capture the full lifecycle of infrastructure projects.

The municipal segment, accounting for 40% of sales, is the growth engine. Projects like the Waukesha, Wisconsin, water pipeline—where CNM supplied 26 miles of ductile iron pipe—highlight its role in critical infrastructure upgrades. With U.S. water infrastructure investment expected to grow at a 6-8% annual clip through 2030 (per the American Water Works Association), CNM's scale and local expertise will drive market share gains.

Investment Thesis: Undervalued Equity with Catalysts Ahead

CNM's stock trades at 6.5x 2025E EBITDA, a discount to peers like Fastenal (FAST) at 9.2x. This undervaluation reflects short-term margin concerns, yet the company's long-term drivers—acquisition synergies, municipal demand, and operational efficiency—are underappreciated.

Key catalysts include:
1. Q2 2025 Earnings Call: Management will update on margin recovery and acquisition pipeline progress.
2. Sector Tailwinds: Federal and state funding for water infrastructure (e.g., the 2021 Infrastructure Investment and Jobs Act) will accelerate project backlogs.
3. Share Buybacks: With $39 million deployed in Q1, CNM's $300 million buyback authorization offers a floor for the stock.

Risks and Considerations

• Economic Sensitivity: Residential and non-residential markets remain flat, and a housing downturn could pressure margins.
• Debt Levels: Rising interest rates could increase refinancing costs, though CNM's fixed-rate debt structure mitigates this risk.

Conclusion: A Long Position Warrants Consideration

Core & Main's Q1 results reaffirm its resilience in a challenging environment. With a fortress balance sheet, a secular growth tailwind, and margin initiatives on track, the stock offers a compelling entry point ahead of its earnings call. Investors seeking exposure to U.S. infrastructure spending should view CNM as a core holding, particularly at current valuations.

Recommendation: Buy CNM at $62.41, with a 12-month price target of $75 based on 8.0x 2025E EBITDA. Monitor the Q2 earnings call for margin recovery and acquisition updates. Historical backtesting from 2020 to 2025 shows that buying on earnings announcement days and holding until the next release generated a total return of 113.78%, though investors should be aware of the strategy's maximum drawdown of 40.08%.

This analysis underscores CNM's position as a strategic beneficiary of water infrastructure modernization—a theme that will define U.S. spending for decades. For investors with a long-term horizon, the risk-adjusted upside is compelling.