Analysts Issue Bullish Ratings on QXO, More for Jacobs' Past Successes and M&A Skills, Less for Current Efforts

By Craig Webb, President, Webb Analytics

Stock analysts' initial ratings on QXO issued in recent weeks are universally positive, relying primarily on Chairman and CEO Brad Jacobs' accomplishments at other companies and his buying prowess rather than what he's doing currently to turn the roofing specialist into a $50 billion building materials behemoth.

Six of the eight Wall Street firms that have initiated coverage of QXO since its purchase of Beacon have given QXO an "Outperform" rating, while two issued an even stronger "Buy" signal. Citi Research, which delivered one of the Buy ratings, said QXO has "a unique opportunity" to roll up a building products distribution market "that lags in tech adoption and innovation."

Wells Fargo began its Overweight description by declaring that QXO "isn't your run-of-the-mill distributor" and has a realistic path to grow revenues five-fold by 2035.

(Note: On Aug. 14, the morning after this story was published, QXO reported net sales of $1.91 billion in Q2, which includes the period starting April 29 when it acquired Beacon. Its net loss for the quarter was $58.5 million, while Adjusted EBITDA was a positive $204.6 million, or 10.7% of sales. All but $15 million of the sales involved Beacon. Gross profit was $401.7 million for a gross margin of 21.1%. Positive EBITDA adjustments included $65.6 million in transaction costs, $35.3 million in restructuring costs, $65 million in stock-based compensation, $107 million in depreciation and amortization, and $80.3 million for inventory. Income taxes cost the company $177.8 million. The balance sheet shows that goodwill accounts for $5.14 billion of the $17.11 billion in total equity.)

Analysts consistently based their optimism on how Jacobs created huge companies in the past, particularly at URI, the world's largest equipment rental company; at United Waste, the fifth-largest solid waste business in North America; and at XPO, one of the world's largest logistics companies. They noted that Jacobs has completed roughly 500 M&A transactions during his career en route to building billion-dollar businesses. Truist, the other firm with a Buy rating, sounded a common tune in regarding QXO's purchase of Beacon as a a significant first step toward consolidating what remains a highly fragmented industry. William Blair expects QXO will move beyond roofing into siding, gutters, insulation, lumber, decking, and wallboard. Indeed, while all these analyses were being written, QXO sought to buy Gypsum Management & Supply, only to be outbid by The Home Depot.

Several also stressed Beacon's embrace of technology as a competitive advantage; a Chief Artificial Intelligence Officer was one of QXO's first big hires. Many distributors today still rely on paper documents and Excel spreadsheets to manage their operations, Wells Fargo said. Oppenheimer's analysis said you can expect to see AI deployed in pricing, procurement, forecasting, replenishment, inventory, warehousing, routing, and sales. Wolfe said management appears to be "seeking to 'Create a Superorganism' with end-to-end intelligent capabilities that uses data to drive quick and efficient decision-making."

In a June presentation, Jacobs said his goal is to double Beacon's EBITDA organically within five years. That presentation contained few examples of what QXO was doing beyond redesigning the org chart and going on a listening tour. But the analysts' reports contained more details. They noted that QXO:

• Created a national call center with 125 individuals dedicated to dormant accounts.

• Increasingly has been pushing cross-selling opportunities.

• Expanded Beacon’s TRI-BUILT brand (“historically under penetrated, because sales incentives were not aligned with margins,” Wells Fargo said) partly by offering more products, such as sealants and insulation.

• Reduced the number of price overrides by using digital tools to maximize profitable pricing.

• Centralized procurement, going from 2,300 different vendor deals to spending as much as possible with the 20 vendors that now account for roughly 70% of company-wide volumes.

• Is working on improving fleet optimization through smarter load building, more efficient routing, and more optimized scheduling.

• Was picking a single ERP for the entire company.

Ultimately, QXO could become "more like a combination of ABC Supply and a new construction heavy distributor such as Builders FirstSource and US LBM," William Blair said. Its list of QXO's likely targets included companies operating in Europe along with North American giants like BFS, Foundation Building Materials, US LBM, Kodiak Building Partners, 84 Lumber, TopBuild, Core & Main, and BlueLinx.