TRG | The Bottom Line – 9/8

Core & Main (CNM) this week reported a Q2’23 earnings beat as margins once again held up better than expected. The stock traded off ~8% intraday vs. the S&P 500 down 1%. We think the stock reaction was driven by a few factors. CNM color on softening new start activity in parts of non-res end markets were not meaningfully different what heavy materials producers (who are earlier in the construction value chain) had reported in late July/early August – while multi-family and warehousing was softening, other non-res end markets such as manufacturing and data centers continue to see growth. Headlines read that the top end of full year sales guidance was lowered due to signs of softening in non-res. Just this past week, TRG hosted investor evens with Granite Construction (GVA) and Vulcan Materials (VMC) in the northeast, with both companies echoing a similar sentiments today on the non-res end market. GVA acknowledged a dip in non-res and is already seeing trends recover for that company. Global equipment rental company Ashtead Group (AHT) recent earnings also highlighted mega project driving U.S. subsidiary Sunbelt demand, benefitting from a record level of construction starts, fueled by on-shoring/re-shoring, manufacturing and data-communication investments (data centers, EVs, warehousing, utility/grid), and legislative acts that could amount to $2T of investments. Still, signals remain mixed by company type and project type, and the Street is sitting up and paying attention to the reality of softening of non-res in certain end markets. The resi scare from earlier this year is mostly behind us (at least from a sentiment standpoint), and the follow-on effect to non-res is now an area of investor focus. In all, TRG expects to see lackluster stock performance this fall from non-res focused names, even if companies such as CNM continue to do all the right things.