Core & Main is one of two national players in the waterworks and fire protection product distribution oligopoly.
Investing alongside CD&R, a leading private equity firm with extensive experience in building materials and distribution businesses.
Drivers of shareholder value include the tailwinds of infrastructure spend, strategy to consolidate a fragmented sector, and implementation of operational best practices.
Core & Main is a lesser-known brand name and relatively under followed by investors, which creates the opportunity to accumulate shares before others jump on the bandwagon.
Main concerns are the current volatility in input prices and full valuation. I may initiate a toehold position and add to my position as the company demonstrates more progress.
Art Wager/iStock via Getty Images Thesis
This is an opportunity to invest in Core & Main ( CNM ) – one of only two national waterworks and fire protection product distributors – alongside CD&R, a leading private equity firm with extensive expertise in building materials and distribution businesses.
Drivers of value for investors include the tailwind of infrastructure spend, CD&R’s implementation of operational best practices across the company, and strategy to consolidate this fragmented sector.
Core & Main is a lesser-known brand name and relatively under-followed, which gives investors an opening to accumulate shares before others jump on the bandwagon
As valuations are full at this time, I plan to initiate a toehold position add to my position as the company demonstrates more progress. Overview
Core & Main is a leading national distributor of waterworks and fire protection products. Even though the company has revenues of $4.2 billion and a market cap of $6.8 billion, few outside the industry know of the company.
This is because the company existed as a relatively obscure division within Home Depot Supply (now Home Depot ( HD )) until CD&R acquired it through a corporate carveout in August 2017. After creating the necessary corporate infrastructure, building up the management team, and setting the company on a buy-and-build strategy, CD&R took the company public in July 2021.
Today, the company has 3,700 total Associates, 285 branches in 47 states and 170 metropolitan statistical areas across the US. It operates a fleet of 850 trucks and 350 trailers to ensure its products are delivered to customers in a timely manner. What does the company do?
As a distributor, Core & Main serves as the link between 4,500 suppliers and a broad range of 60,000 customers, which include municipalities, public utilities, private water companies, and professional contractors across the US. In addition to making available 200,000 stock keeping units in the areas of water distribution, wastewater, storm drainage, erosion, and fire protection products to its customers (figure 1), the company also provides value-added customer support in areas including project planning, technical knowledge, local expertise, product customization, and coordinated deliveries.
Figure 1: Core & Main’s representative products Source: Company S-1
Core & Main estimates the size of the waterworks and fire protection product market at $27 billion, of which it has a 14% market share. Its waterworks products enable municipalities to provide, management, and measure the use of water to their end-customers, while its fire protection products are necessary for sprinkler systems (figure 2).
Figure 2: Core & Main’s products enable municipalities to provide and manage water Source: Core & Main investor presentation
About 45% of the company’s products are sold to municipal water works (figure 3, left chart), and about 55% are sold for repairs and replacement (right chart). As municipal spending tends to be less correlated to economic growth and repairs of broken waterworks or fire protection systems are non-discretionary, these two segments are relatively stable compared to new construction and privately-funded projects.Figure 3: Market and business mix Source: company S-1For the year ended January 2021, waterworks constituted 89% of revenues, while fire protection products accounted for the remaining 11% (figure 4). Fire protection sales increased 42% since 2019, compared to overall revenue growth of 14%, due to a large acquisition the company made in July 2019.Figure 4: Core & Main’s sales by categorySource: company S-1 Thesis Investing alongside a top private equity firm CD&R is among the most established and respected private equity firms. While it is less of a household name compared to its publicly listed brethren such as Apollo Global Management ( APO ), Blackstone ( BX ), The Carlyle Group ( CG ), or KKR ( KKR ), it has built a world class team of operating and financial partners, deep experience in businesses similar to Core & Main, executed well on industry consolidation strategies, and […]