Industrial distribution company Core Main saw its shares climb 3.6% to a price of $25.39 -- outperforming the S&P 500 index by 7.6%. With an average rating of buy, the stock is now 15.37% below its average analyst target price of $30.
Core Main belongs to the industrial sector, which includes companies engaged in the aerospace, defense, engineering, construction equipment, and metal fabrication businesses. The sector also includes consulting companies and conglomerates, whose activities may span several industries, and even across sectors.
As investments, companies that conduct business within a single industry may prove vulnerable to economic cycles, as demand is tied to their customers’ projections of future growth. Diversified conglomerates, on the other hand, can ride out the cycles since usually at least one of their businesses will be performing well at any given time. Economic cycles do not impact each industry to an equal extent, or at the same time.
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US industrial companies is 21.9, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Core Main 's trailing 12 month P/E ratio is 19.4, based on its trailing Eps of $1.31. The company has a forward P/E ratio of 16.4 according to its forward Eps of $1.55 -- which is an estimate of what its earnings will look like in the next quarter.
Earnings are the most widely used metric for understanding a stock's valuation. When considered alongside the company's revenue growth, they can also give insight into the company's margins, which in turn can allow us to make inferences about its possible competitive advantages. Core Main 's year on year (YOY) quarterly earnings and revenues grew at a rate of 71.9% and 51.5% respectively. Since the earnings growth rate is higher than the revenue growth rate, we can deduce that the company's profit margins are widening. Companies can increase their earnings at a faster rate than their revenue by reducing their tax liability, raising prices, or cutting their overhead or the cost of goods sold.
Unlike earnings, gross profits only take into account the company's cost of goods sold (i.e. cost of labor and materials only). The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. In CNM's case, the gross profit margins are 26.0%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market.
The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently from their core business: the cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's levered free cash flow, which for Core Main is -$147,800,000.
If it weren't negative, the unlevered free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for CNM, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. Core Main has a P/B ratio of 3, which is still below the average P/B ratio of the Industrial sector, which stood at 3.75 as of the second quarter of 2022.
Since it has below average P/E and P/B ratios, decent profit margins, and an analyst consensus of some upside potential, Core Main is likely fairly valued at today's prices as long as this year's negative cash flow doesn't turn into a trend.
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