Core & Main (NYSE:CNM) Misses Q2 Sales Targets, Stock Drops

Water and fire protection solutions company Core & Main (NYSE:CNM) fell short of analysts’ expectations in Q2 CY2024, with revenue up 5.5% year on year to $1.96 billion. The company’s full-year revenue guidance of $7.35 billion at the midpoint also came in 1.8% below analysts’ estimates. It made a GAAP profit of $0.61 per share, improving from its profit of $0.48 per share in the same quarter last year.

Is now the time to buy Core & Main? Find out by accessing our full research report, it’s free.

"We grew net sales by approximately 6% to a new quarterly record of $1.96 billion, reflecting strong growth from acquisitions that was partially offset by project delays from wet weather conditions and comparably lower end-market volumes," said Steve LeClair, chair and CEO of Core & Main.

Formerly a division of industrial distributor HD Supply, Core & Main (NYSE:CNM) is a provider of water, wastewater, and fire protection products and services.

Infrastructure Distributors

Focusing on narrow product categories that can lead to economies of scale, infrastructure distributors sell essential goods that often enjoy more predictable revenue streams. For example, the ongoing inspection, maintenance, and replacement of pipes and water pumps are critical to a functioning society, rendering them non-discretionary. Lately, innovation to address trends like water conservation has driven incremental sales. But like the broader industrials sector, infrastructure distributors are also at the whim of economic cycles as external factors like interest rates can greatly impact commercial and residential construction projects that drive demand for infrastructure products.

Sales Growth

A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Over the last five years, Core & Main grew its sales at an incredible 15.5% compounded annual growth rate. This is a great starting point for our analysis because it shows Core & Main’s offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Core & Main’s recent history shows its demand slowed significantly as its annualized revenue growth of 6.8% over the last two years is well below its five-year trend.

This quarter, Core & Main’s revenue grew 5.5% year on year to $1.96 billion, missing Wall Street’s estimates. Looking ahead, Wall Street expects sales to grow 10.1% over the next 12 months, an acceleration from this quarter.

Today’s young investors won’t have read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.

Operating Margin

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Core & Main has done a decent job managing its expenses over the last five years. The company has produced an average operating margin of 9.4%, higher than the broader industrials sector.

Analyzing the trend in its profitability, Core & Main’s annual operating margin rose by 5.6 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q2, Core & Main generated an operating profit margin of 10.4%, down 1.8 percentage points year on year. Since Core & Main’s operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.

EPS

Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Core & Main’s EPS grew at an astounding 56.2% compounded annual growth rate over the last five years, higher than its 15.5% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into the nuances of Core & Main’s earnings can give us a better understanding of its performance. As we mentioned earlier, Core & Main’s operating margin declined this quarter but expanded by 5.6 percentage points over the last five years. Its share count also shrank by 1.6%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Core & Main, its two-year annual EPS growth of 21.2% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q2, Core & Main reported EPS at $0.61, up from $0.48 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Core & Main to grow its earnings. Analysts are projecting its EPS of $1.87 in the last year to climb by 34.4% to $2.52.

Key Takeaways from Core & Main’s Q2 Results

We struggled to find many strong positives in these results. Its revenue unfortunately missed and its EPS fell short of Wall Street’s estimates. Overall, this was a mediocre quarter. The stock traded down 9.1% to $42.55 immediately after reporting.

Core & Main may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.