According to 2024 estimates from the Environmental Protection Agency (“EPA”), roughly $630 billion is needed over the next 20 years to repair and replace America’s aging water and wastewater infrastructure.

Modernizing aging water infrastructure and building new systems are crucial undertakings that can cost billions of dollars, requiring many components and thousands of man hours to complete.

Core & Main (CNM) has built its business around this critical need. The firm is a leading distributor of water, wastewater, storm drainage, fire protection products, and other services.

Since going public in 2021, the company has generated above-average returns. Yet despite that, it trades at a below-average P/E.

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According to 2024 estimates from the Environmental Protection Agency (“EPA”), roughly $630 billion is needed over the next 20 years to repair and replace America’s aging water and wastewater infrastructure.

Modernizing aging water infrastructure and building new systems are crucial undertakings that can cost billions of dollars, requiring many components and thousands of man hours to complete.

And this is where Core & Main (CNM) comes in.

Core & Main is a distributor specializing in water, wastewater, storm drainage, fire protection products, and related services. The company services a diverse customer base composed of municipalities, utilities, contractors, builders, and industrial clients.

The firm’s product portfolio is vast and diverse, this includes pipes, valves, fittings, fire protection gear, fusible piping, utility water, electric and gas meters, and other products used in storm drainages, geosynthetics, and treatment plants.

The company has expanded its project coverage to data centers. It recently provided water, wastewater, and storm drainage infrastructure to a data center development project in Indiana.

Core & Main has built a vast network and customer base over the years, having over 370 branches and servicing more than 60,000 customers across the U.S. The firm’s vast distribution network and product portfolio means that it can act as a one-stop shop for the water infrastructure needs of its clientele.

Since Core & Main’s industry is highly localized, its vast geographical footprint has allowed it to embed itself in many areas across the U.S., providing it not only a wide reach but also deep expertise in local regulations and project requirements.

Core & Main’s sales are evenly split between new construction and repair-and-replacement work. Meaning that it’s insulated from cyclicality. It benefits from both new construction and modernization projects.

Moreover, its revenue sources are diverse, deriving 44% from municipal customers, 38% from non-residential customers, and 18% from residential clients.

The company has supplemented its operations and fueled its growth over the years by leveraging an acquisition strategy. Since 2017, the firm has consistently pursued strategic acquisitions, adding at least one company to its portfolio annually.

Core & Main’s financial performance reflects the viability of its business model. Since 2022, the company’s Uniform return on assets (“ROA”) have never dipped below 30%, double the corporate average. It also delivered a Uniform asset growth of 21% last year.

Yet despite its strong performer status, the company’s stock trades at a below-average 15x Uniform P/E, a modest valuation for an above-average performer and beneficiary of recurring demand and long-term infrastructure investment.

This valuation suggests that the market is cautious about the sustainability of water infrastructure spending.

On a contrary note, the need for upgrading aging water systems isn’t going away soon due to its critical nature. Moreover, construction projects will continue to require reliable water and drainage solutions, positioning Core & Main as a beneficiary of both trends.

With its vast operational scale and long-term tailwinds, Core & Main appears to be well-positioned as investment in essential infrastructure continues for years to come.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research