Core & Main: 40% Selloff Since May, But I Am Not Buying Yet (NYSE:CNM)

DougVonGausig Core & Main, Inc. (NYSE:CNM) recently published their Q2 2024 results on September 4. On the day of the earnings release, the share price fell by over 15%, leaving shareholders questioning how much further it could drop until the end of the year. In this article, I will discuss Core & Main’s recent performance, with a focus on the pressures and headwinds that the company is currently facing, including weather disruptions, lower steel pipe prices, and a slowdown in commercial projects. In the Outlook section, I will explain my rationale behind the Hold rating by reviewing the latest insider buying transactions and share buybacks, among many other financial metrics. For now, I will start with a brief company overview section for those new to this stock. Company Overview Core & Main is a US-based distributor of water, wastewater, storm drainage, and fire protection products, operating about 335 branches across 48 states. Their revenue comes from direct product sales and integrated services that help customers manage inventory and procurement. Although they operate within a single business segment, they break down their revenue by product type. I’ve included a table below with revenue figures from their latest annual report. Year Pipes, Valves & Fittings (million) Storm Drainage Products (million) Fire Protection Products (million) Meter Products (million) Total Revenue (million) 2023 $4,504 $985 $688 $525 $6,702 2022 $4,548 $949 $701 $453 $6,651 2021 $3,361 $687 $565 $391 $5,004 Click to enlarge Author’s compilation from the latest 10-K In regards to the ownership of the company, I considered including below a table showing the beneficial ownership of class A and class B common stock. SEC 14A I like the 73.6% ownership of class B common stock across all 15 directors and executive officers, as it shows that management has a significant amount of skin in the game. Recent Performance Let’s start with dessert, and cover the headwinds first. Weather disruptions during the second quarter had a direct impact of $50 million in lost sales, representing about 3% of total revenue for the quarter. The heavy rainfall and flooding during May and June in Texas and the Midwest region led to delays in construction and infrastructure projects, particularly in underground utility and waterworks operations. Although management mentioned that they expect a longer construction season in Q4 to make up for the lost ground, I remain skeptical whether these delays can be fully mitigated within 2024. Another headwind comes from a noticeable slowdown in commercial project starts, with many developers delaying their projects due to macroeconomic uncertainties, particularly around financing and interest rates. I believe the project delays are likely to persist in the near term, even if the Fed cuts the interest rate in September. This is because the positive effects of a rate cut often take up to several months to one quarter to materialize. Another pressure comes from the decline in steel pipe prices, which have fallen to historic lows, affecting sales of their fire protection products. This contributed to the 50 basis point drop in total gross margins in the second quarter, and to the 4.8% decline in adjusted EBITDA. SG&A expenses increased by 12.6% year-over-year, mainly due to costs associated with recent acquisitions. In fact, acquisitions were the main driver behind the 5.5% increase in net sales, contributing 9% to the total growth. Without these acquisitions, net sales would have declined by 3.5%. This makes me sweat, as I tend to avoid companies that rely heavily on acquisitions to drive sales growth. Interest expenses increased significantly, from $22 million in Q2 2023 to $36 million in Q2 2024​. This increase makes sense to me, given the issuance of a $750 million term loan and increased borrowings under the company’s senior revolving credit facility. These loans, among other uses, funded acquisitions, five of which closed during the second quarter. Inventory costs increased in the second quarter, which led to a small decline in gross margins, from 26.9% in Q2 2023 down to 26.4% in Q2 2024. The main driver for this increase in inventory costs was inflationary pressures that had been carried over into the beginning of 2024. Despite these challenges, there were some positive results. Their acquisition strategy is helping the company expand into new geographical areas, like the Canadian market, following the acquisition of HM Pipe Products. Their meter product sales increased by 48%, primarily driven by the success of smart metering technology, which has seen growing adoption by municipalities. Another interesting initiative is the increasing penetration of their private label products. These products contribute to only 2% of COGS, but they offer higher margins, and, as you may know, I highly favor companies that focus on high margins and low volumes. Outlook A quick look at the daily chart below shows a steep decline in the share price since May this year. TradingView The share price declined by 37% since May, with over 15% of the decline happening during Q2 earnings release. Considering the financial results from the last two earnings releases, I’m not surprised by the decline, although I must admit I’m disappointed to see no insider buying activity so far. Therefore, I believe there is a high risk that the share price could drop further by the end of the year. In the chart above, I have added a possible support level at $32, although I remain skeptical about the validity of this support due to a lack of historical data. However, they have a solid share buyback program of $500 million, approved in June this year. During the second quarter, the company bought back 430,000 shares, totaling $21 million, which I see as a good amount, considering that free cash flow was $39 million. A quick look at their income statement shows a decline in operating income, with net income and total revenue remaining relatively flat. TradingView It seems that growth has stagnated in the last few years. In regards to their debt, even though interest payments have been increasing, as explained in the previous section, the quick and current ratios are above one, with debt to assets at 0.43. Therefore, I am not worried about their ability to pay short-term and long-term debt. However, despite a solid buyback program, positive free cashflows, and debt at a manageable level, I am not rating this stock as a buy due to the lack of insider buying activity following a significant decline in the share price. Considering the high beneficial ownership across all directors and executive officers in the company (74%), I believe they know the company very well inside out. Therefore, the lack of insider buying in the open market following a 40% selloff since May makes me believe the share price could drop even further, closer to the $32 price level. Therefore, I keep a Hold rating. Conclusion To conclude, although there are good signs of their acquisition-driven growth, with expansion into new markets, such as Canada, I am concerned about the headwinds that the company is currently experiencing. The impact of weather disruptions, inflationary pressures on inventory costs, and the decline in steel pipe prices are having a direct impact on their performance. Additionally, the slowdown in commercial projects due to macroeconomic uncertainties adds even more pressure to their financial situation. Despite a solid share buyback program and manageable debt levels, the lack of insider buying activity following a significant 40% drop in the share price since May makes me rate this stock as a Hold. I recommend keeping an eye on insider buying activity if the share price drops further to the $32 mark.

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