On the Road: Core & Main

 

Pembroke has a long history of investing in industrial companies throughout the Midwestern United States. In recent years, our investments have taken us to Illinois, Wisconsin, Indiana, Oklahoma, Kansas, and most recently, in the case of Core & Main, their corporate headquarters in Saint Louis, Missouri.

By way of background, Core & Main (“CNM”) is a leading distributor of water, wastewater, storm drainage and fire protection products serving municipalities, private water companies and contractors throughout the United States. With a history dating back to 1874, Core & Main leverages its deep industry expertise and broad product portfolio to support the maintenance, repair and construction of critical water infrastructure. It is well positioned to play a pivotal role in the modernization of the US’s aging water infrastructure.

Visiting the Headquarters

Pembroke derives significant value from corporate headquarters visits. Unlike typical investor conference interactions, we find that headquarters and site visits allow us to assess the “bench strength” of a company. In the case of Core & Main, the calibre and competence of all the professionals we met were evident.

In addition to senior management, we also met with a regional vice president (in this case, the vice president responsible for the Central Region branches), the head of financial planning and analysis, a branch manager, and a branch salesperson.

Investment Thesis

We first invested in CNM in April 2023 at approximately $23. The thesis is as compelling today as it was then. CNM is a prototypical, high-quality Pembroke company. It consistently grows revenue in the high single digits and above, has earnings close to 15%, and returns 20 cents and above on every dollar of equity invested. CNM also benefits from both compelling moats (scale, service protocol, operational systems, private label brands, to name a few) and an advantageous market structure (in the power seat between thousands of suppliers and tens of thousands of customers).

Finally, the ship is steered by an experienced team that is well aligned with investors and thinks about growing the business for the long term with a deep respect for capital.

CNM’s Growth

Core & Main’s growth is fuelled by the urgent need to address the aging water infrastructure in the United States. The first photos below, taken at the company’s headquarters, shows several old wooden pipes found at a municipal water project that CNM supplied.

In addition, various stimulus packages enacted during the pandemic have provided significant funding for infrastructure projects, further increasing demand and visibility for the coming years. These factors are expected to contribute to continued growth as municipalities and private companies increasingly invest in critical water systems.

During our visit to a nearby branch, it became clear how important in-depth local knowledge is to Core & Main’s success. The branch staff demonstrated a deep understanding of the specific needs and challenges of their local market, from the types of projects most commonly undertaken to the unique preferences and requirements of local contractors. This intimate knowledge enables the branch to tailor its services and solutions to ensure they meet the exact requirements of each project.

In addition, the decentralized decision-making process for bidding on projects was highlighted as a significant benefit. By empowering the local team to make fast, informed decisions, Core & Main is able to respond quickly to bid opportunities as well as to provide competitive and thoughtful proposals that are closely aligned with local market realities.

 

 

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