Executive Summary / Key Takeaways

• The Infrastructure Imperative: Core & Main sits at the intersection of non-discretionary water infrastructure spending and cyclical construction markets, with 42% exposure to municipal budgets that must be spent regardless of economic conditions, providing a durable foundation beneath near-term residential volatility.

• Margin Expansion Under Pressure: Despite Q2 2025 headwinds from elevated SG&A (14.4% of sales vs. 13.6% prior year) and softer residential demand, gross margins expanded 40 basis points to 26.8% through private label penetration (4% of sales) and sourcing initiatives, demonstrating pricing power that should accelerate as cost-out actions take hold in 2026.

• Acquisition Integration at an Inflection Point: Having added $620 million in annualized sales through 10 acquisitions in fiscal 2024, the company faces the critical test of realizing synergies while managing elevated operating costs, with the Canada Waterworks acquisition signaling continued M&A appetite despite near-term margin compression.

• Cyclical vs. Structural Tension: Management's revised guidance reflects a 2-4% above-market growth target amid low double-digit residential declines, creating a narrative of outperformance in a down market that hinges on execution of treatment plant projects, fusible HDPE momentum, and metering backlog conversion in the second half of 2025.

Setting the Scene: The Essential Distributor in a Fragmented Market

Core & Main, founded in 1874 and headquartered in Saint Louis, Missouri, operates as one of only two national distributors in a highly fragmented $39 billion water infrastructure market. The company became an independent entity in 2017, marking a strategic inflection point that catalyzed aggressive expansion through over 20 greenfield locations and more than 40 acquisitions, collectively adding nearly $300 million and $1.8 billion in annual net sales respectively. This history matters because it explains how a 150-year-old company transformed from a regional supplier into a national platform with approximately 370 branches across 49 states, positioning it to capture share in an industry where scale creates tangible advantages in procurement, logistics, and customer service.

The business model centers on four product categories that serve three distinct end markets. Pipes, valves, and fittings represent the core, generating $1.43 billion in Q2 2025 sales through PVC, ductile iron, and fusible HDPE products. Storm drainage products delivered 9.5% growth to $335 million, benefiting from Infrastructure Investment and Jobs Act (IIJA) funding for road and bridge projects. Fire protection products, while facing steel pricing pressures, contribute $155 million quarterly, and meter products, despite a 7% decline to $173 million due to project timing, maintain a growing backlog of smart meter upgrade projects. This product mix, diversified across 42% municipal, 38% non-residential, and 20% residential exposure, provides stability that pure-play construction distributors lack. The municipal anchor is particularly crucial—it represents non-discretionary spending on aging water systems that must be maintained regardless of economic cycles, creating a recurring revenue foundation that competitors cannot easily replicate.

Industry dynamics favor the prepared. The U.S. faces a widening gap between water supply and demand driven by population growth, economic development, and aging infrastructure that loses billions of gallons annually to leaks. The IIJA's $55 billion allocation for water infrastructure through 2026 provides a multi-year funding tailwind, while municipal utilities continue raising rates to fund necessary replacements. This structural demand growth, estimated in the low single digits annually, creates a rising tide that benefits national distributors with the technical expertise to support complex treatment plant projects and smart meter deployments. Core & Main's strategy of expanding "inside the fence" at treatment plants—moving from connections to specialty valves and equipment—exploits a high-margin niche where technical knowledge creates switching costs.

Technology, Products, and Strategic Differentiation

Core & Main's competitive moat rests on three pillars: technical expertise in specialized applications, a national footprint with local execution, and value-added services that transcend commodity distribution. The fusible HDPE offering exemplifies this differentiation, delivering double-digit growth by solving complex joining challenges for water and gas infrastructure that standard PVC or ductile iron cannot address. This technical capability creates stickiness with engineering firms and large contractors who specify products based on performance, not price, enabling market share gains even in flat markets.

Private label penetration, growing from 2% to 4% of revenue with over 1,000 SKUs, represents a deliberate margin expansion strategy. By sourcing directly from manufacturers and controlling the brand, Core & Main captures the distributor markup while offering customers competitive pricing. The 30,000 square feet of additional distribution space allocated to private label products signals management's confidence in reaching 10% penetration over time, which would add approximately 200 basis points to gross margins based on typical private label premiums. This initiative directly counters the margin pressure from inflation in facilities, fleet, and distribution costs that elevated SG&A in Q2 2025.

The treatment plant project expansion illustrates how the company deepens customer relationships. Historically focused on connections to and from facilities, Core & Main now sells specialty valves and equipment "inside the fence," capturing a larger share of wallet on projects that can exceed $100 million. This shift requires technical sales resources and engineering support, but yields higher margins and longer project cycles that smooth quarterly volatility. The high single-digit growth in this category during fiscal 2024, despite broader market softness, demonstrates the strategy's effectiveness.

Research and development manifests not in laboratory spending but in application engineering and product development. The company's investment in smart meter technology partnerships and technical resources positions it to capture the accelerating AMI (advanced metering infrastructure) upgrade cycle, with utilities facing regulatory mandates to replace aging mechanical meters. The backlog of metering projects, delayed in Q2 but expected to release in the second half, represents a known catalyst that could drive 10-15% segment growth, supporting the company's 2-4% above-market growth target.

Financial Performance & Segment Dynamics: Evidence of Strategy Under Stress

Q2 2025 results reveal a company executing its strategy while absorbing cyclical shocks. Net sales grew 6.6% to $2.093 billion, driven by higher volumes and acquisitions, yet this top-line expansion masked divergent segment performance that validates the diversification thesis. Pipes, valves, and fittings grew 7.6% to $1.43 billion, with fusible HDPE projects contributing significant share gains. Storm drainage accelerated 9.5% to $335 million, directly benefiting from IIJA-funded infrastructure spending. These municipal and non-residential categories, representing 80% of revenue, are performing well above market rates.

The margin story is more nuanced. Gross profit expanded 8.1% to $560 million, with margins improving 40 basis points to 26.8% year-over-year and 10 basis points sequentially from Q1. This improvement, achieved despite inflationary pressures, reflects successful execution of private label and sourcing initiatives. However, SG&A expenses grew 12.7% to $302 million, or 14.4% of sales versus 13.6% prior year, driven by $17 million in incremental acquisition costs and unusually high employee benefit expenses. This 80-basis-point SG&A deleverage compressed adjusted EBITDA margins by 40 basis points to 12.7%, illustrating the tension between growth investments and near-term profitability.

The segment-level analysis explains why management remains confident despite margin pressure. Meter products declined 7% in Q2 due to project delays and a difficult comparison against 48% growth in the prior year, but the company maintains a growing backlog and healthy pipeline of bids for second-half release. Fire protection products grew 8.4% in Q2 after targeted cost-out actions earlier in the year addressed steel pricing pressures and non-residential softness. This rebound demonstrates management's ability to quickly adjust cost structures without disrupting customer service, a capability that will prove valuable as additional cost-out measures are implemented in response to residential weakness.

Cash flow generation remains robust, with $34 million provided by operations in Q2 and $111 million for the six-month period. While down from prior year due to higher working capital investment to support growth, the company maintains its historical 60-70% conversion of adjusted EBITDA to operating cash flow. Net debt of $2.3 billion at 2.4x leverage sits within management's target range, and $1.1 billion in total liquidity provides flexibility for acquisitions and greenfield expansion. The $47 million in share repurchases during the first half, with $277 million remaining under authorization, signals capital allocation discipline while maintaining growth investments.

Outlook, Management Guidance, and Execution Risk

Management's revised fiscal 2025 guidance reflects a realistic assessment of cyclical pressures while maintaining confidence in structural outperformance. Net sales guidance of $7.6-7.7 billion (lowered from $7.6-7.8 billion) implies full-year growth of 2-4% on an average daily sales basis, with the reduction driven primarily by residential lot development now expected to decline low double digits versus prior expectations of flat performance. This 10-12 percentage point swing in the 20% residential exposure creates a 2-2.5% headwind to overall growth, which the company plans to offset through its 2-4% above-market growth initiatives.

The end market outlook reveals the municipal advantage. Municipal volumes are expected to grow low single digits, supported by necessary repair and replacement activity, advanced metering projects, and new treatment facility construction. Non-residential volumes are projected roughly flat, with data center momentum offsetting broader construction weakness. Pricing is expected to be neutral for the full year, with tariff-related increases on non-pipe products offsetting moderating PVC pipe prices. This pricing stability, combined with gross margin initiatives, supports management's expectation for continued margin expansion despite SG&A pressure.

Execution risk centers on three variables: residential stabilization, cost-out realization, and acquisition synergy capture. The residential market, which softened further through August, represents the largest uncertainty. Management's cost-out actions, targeting areas that won't impact customer service, are expected to deliver partial savings in H2 2025 with a larger annualized benefit in 2026. This timing lag creates a margin trough in the second half that investors must endure. Meanwhile, the ten acquisitions completed in fiscal 2024, with $620 million in combined sales, have not yet reached full synergy potential, contributing to elevated SG&A that should normalize as integration plans mature.

The metering backlog provides a near-term catalyst. With project delays in Q2 creating a difficult comparison, management expects second-half releases to support strong full-year metering growth. This is critical because meter products represent a high-growth, high-margin category where Core & Main has built technical leadership. The 24% growth achieved in Q3 2024 and the 48% prior-year comparison in Q2 2025 demonstrate the category's volatility but also its potential to drive above-market performance when project timing aligns.

Risks and Asymmetries: What Could Break the Thesis

The central thesis faces three material risks that could fundamentally alter the investment case. First, residential market deterioration could exceed management's low double-digit decline forecast. With residential lot development accounting for 20% of sales and experiencing softness particularly in Sunbelt markets due to higher interest rates and affordability concerns, a 15-20% decline would create a 3-4% headwind that even strong municipal performance might not offset. This risk is amplified because residential weakness appears early in the construction cycle—lot development precedes homebuilding—meaning Core & Main feels the pain before broader residential indicators turn.

Second, inflationary cost pressure could persist longer than anticipated, preventing SG&A leverage from materializing. The 12.7% SG&A increase in Q2 included unusually high employee benefit costs and inflation in facilities, fleet, and distribution expenses. If these pressures continue into 2026, they could offset the benefits of cost-out actions and compress operating margins even as gross margins improve. This risk is particularly acute given the company's acquisition-driven growth, as newly integrated businesses often carry higher cost structures that take 18-24 months to optimize.

Third, acquisition integration could falter, destroying rather than creating value. The $623 million spent on acquisitions in fiscal 2024 represents a significant capital deployment that must generate returns. While management's phased, growth-oriented integration approach—starting with people, sales, and operations before cost synergies—has merit, it also delays financial benefits. If the 10 acquisitions fail to achieve planned results, the resulting margin compression and capital destruction would undermine the entire growth strategy. This risk is heightened by the fragmented nature of the waterworks industry, where many targets are family-owned businesses with limited scale and potential culture clashes.

On the positive side, three asymmetries could drive upside beyond guidance. IIJA funding acceleration, particularly if Congress appropriates additional water infrastructure dollars beyond the current $55 billion, would boost municipal spending above the low single-digit growth forecast. The metering upgrade cycle could prove larger and faster than expected, with regulatory mandates for lead service line replacements and smart meter deployments creating a multi-year tailwind. Finally, successful integration of recent acquisitions could yield synergies exceeding management's targets, with the Canada Waterworks acquisition providing a platform for international expansion that opens a new growth vector.

Valuation Context

Trading at $49.81 per share, Core & Main carries a market capitalization of $9.87 billion and enterprise value of $12.38 billion. The stock trades at 22.2 times trailing earnings and 13.4 times EBITDA, a discount to direct competitor Ferguson (FERG) at 27.1 times earnings and 18.9 times EBITDA, reflecting Core & Main's smaller scale and higher cyclical exposure. The price-to-sales ratio of 1.3x sits below Ferguson's 1.65x and Grainger (GWW)'s 2.6x, suggesting the market assigns a lower multiple to water infrastructure distribution despite similar growth prospects.

Cash flow metrics reveal a company generating substantial free cash flow, with a price-to-free-cash-flow ratio of 17.5x and price-to-operating-cash-flow of 16.3x. These multiples compare favorably to industrial distributors like Grainger (37.7x P/FCF) and Fastenal (FAST) (48.9x P/FCF), indicating the market may be undervaluing Core & Main's cash generation capability. The company's historical 60-70% conversion of adjusted EBITDA to operating cash flow, if maintained, would produce $550-610 million in operating cash flow in fiscal 2025, supporting both reinvestment and shareholder returns.

Balance sheet strength provides strategic flexibility. Net debt of $2.3 billion at 2.4x leverage sits comfortably within management's target range, while the current ratio of 2.25x and quick ratio of 1.26x indicate strong liquidity. The $1.1 billion in available liquidity, primarily through the ABL facility, funds both organic growth initiatives and opportunistic acquisitions. With $277 million remaining under the share repurchase authorization, management has capacity to return capital while maintaining growth investments.

Relative to peers, Core & Main's valuation reflects its niche positioning. Ferguson commands a premium for its massive scale (4x revenue) and broader product portfolio, while Grainger and Fastenal trade at higher multiples due to their MRO focus and superior margins (39% and 45% gross margins versus Core & Main's 26.7%). However, Core & Main's 6.6% Q2 growth outpaced Ferguson's 3.8% and Fastenal's 2.7%, suggesting the market may be underappreciating its above-market growth potential. The key valuation question is whether the company can close the margin gap through private label expansion and operational leverage as acquisitions mature.

Conclusion

Core & Main represents a classic case of cyclical pressure meeting structural necessity. The company's 150-year history and municipal-centric business model provide a durable foundation that competitors cannot easily replicate, while its aggressive acquisition strategy since 2017 has created a national platform positioned to capture share in a fragmented market. The Q2 2025 margin compression and guidance revision reflect real cyclical headwinds, but also mask underlying strength in gross margin expansion and market share gains in key categories like fusible HDPE and storm drainage.

The investment thesis hinges on execution of three interrelated initiatives: realizing acquisition synergies to drive SG&A leverage, expanding private label penetration to boost gross margins, and converting the metering backlog to offset residential weakness. Management's targeted cost-out actions, if successful, could create a meaningful inflection point in 2026, with the full benefit of recent acquisitions and operational improvements flowing through to operating margins.

For long-term investors, the critical variables are the pace of residential stabilization and the timing of cost-out benefits. If management can navigate the current cyclical trough while maintaining above-market growth, the stock's current valuation discount to industrial peers may close as margins expand. The IIJA tailwinds and non-discretionary nature of municipal spending provide a floor, while the metering upgrade cycle and treatment plant expansion offer upside. The story is not without risk, but the combination of market leadership, strategic positioning, and operational initiatives creates a compelling risk/reward profile for those willing to endure near-term volatility for long-term infrastructure exposure.