Maintaining Sell Rating on Core & Main Amid Margin Pressures and Pricing Headwinds

Bank of America Securities analyst Andrew Obin reiterated a Sell rating on Core & Main (CNM – Research Report) today and set a price target of $38.00.

Andrew Obin has given his Sell rating due to a combination of factors impacting Core & Main’s financials and market position. Despite the company’s recent fourth-quarter earnings surpassing consensus expectations, there are concerns about declining year-over-year margins. The reported drop in gross margins reflects ongoing challenges with inventory costs aligning with market prices, and these margins are expected to continue normalizing, which could affect profitability. Moreover, while adjusted EBITDA margins have experienced a notable decrease, the overall performance in revenue and adjusted EBITDA has been higher than anticipated. However, Obin’s outlook remains cautious, particularly due to the potential headwinds from pricing pressures in the upcoming fiscal year.

Modeling by Bank of America Securities suggests a more pessimistic view on pricing trends for Core & Main, factoring in a decline of 2%. This stance is reinforced by recent U.S. producer price index data showing significant year-over-year declines in prices for iron and steel pipe, as well as plastic pipes and fittings. With raw material costs for plastic pipes reverting to pre-pandemic levels, continued price normalization is expected. These factors, combined with Core & Main’s higher financial leverage and slower near-term EBITDA growth relative to peers, contribute to the rationale behind the Underperform rating and a price objective that is significantly lower than the current market price.

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Core & Main (CNM) Company Description:

Core & Main LP Core & Main is a distributor of water, sewer, storm drain, and fire protection products in the United States. It combines local expertise with a national supply chain to provide contractors and municipalities solutions for new construction and aging infrastructure.