One of Wall Street’s first takes on ambitious plans by XPO/RXO/GXO founder Brad Jacobs in the building products field through new company QXO says creating an efficient supply chain is key to the company’s long-term success.
A report by analysts Scott Schneeberger and Daniel Hultberger at Oppenheimer & Co. makes numerous references to the synergies possible in the distribution of building products, a process that they and Jacobs alike note is highly fragmented.
Unlike most reports by equity analysts, the Oppenheimer report on QXO (NASDAQ: QXO) does not come with a buy, sell or hold rating. The company has no revenue beyond the small stream of income from SilverSun, the software company that Jacobs acquired to serve as a vessel for going public. It has yet to make its first acquisition. (The report notes that Jacobs, president and CEO at QXO, has been involved in more than 500 of them in his career.)
However, after several complicated steps that at times could be interpreted as giving QXO crazy market capitalization figures, the company’s float is now tradable in the market. The stock price of QXO has been near $11 in recent days, giving it a market capitalization of about $8 billion, based on the 739 million shares outstanding reported in recent filings.Given that its only assets are the $5 billion it recently raised through various sources, and SilverSun (which was to be spun off but no longer will be), that figure suggests the investment community is already all-in on Jacobs’ next venture.
“QXO seeks to become one of, if not the largest distributors in the … verticals it plans to serve in building products,” the Oppenheimer analysts write. “That would be beneficial since large distributors are best able to leverage their size and scale leadership positions.”
After reviewing the benefits QXO would have as a large building products distributor in securing supplies, the report turned to the distribution side of the ledger.
“Distributors that have the broadest and most efficient networks (supply chains) are also best positioned to serve customers,” the report said. “Customers prioritize receiving their full order of product on time, even over price in most cases. Large distributors who possess the networks to best fulfill customers’ needs are in an optimal position to gain incremental market share and cross-sell additional offerings.”
The playbook and what it brings
The analysts refer to Jacobs’ “playbook”: “Areas QXO is likely to differentiate via technology enhancement include demand forecasting, data acquisition and forecasting, dynamic pricing, digital customer connectivity, supply procurement, delivery route optimization, inventory
management, workforce management, warehouse management, and warehouse automation & robotics.”
There is little doubt it’s an industry that needs it, according to the analysts. Building products distribution is “ripe” for advancement in those areas.
Supply chain issues are important enough to the success of QXO that in its section on “fundamental concerns” at the company, the analysts have an entry on “supply chain challenges.”
“It is of great importance in the building products distribution business to be able to dependably procure inventory from suppliers at required volumes in a timely manner,” the report said. “If product shortages, third-party purchased transportation or internal transportation, or any
other supply chain issues were to befall upon QXO, it could significantly derail the company’s operations and financial results.”
Several building products distribution companies are profiled in the report. And while the analysts don’t specifically cite the company or companies it expects QXO to purchase in its opening moves, it calls the overall plan one of “multiple arbitrage.”
“Once acquisitions close, QXO plans to optimize operations and apply advanced technology to drive organic growth and margin expansion,” the analysts write, discussing the strategy. “The technology opportunities come from the fact, as the analysts write, that building products is “in the nascent stages of advanced technology adoption.”
Phone calls and emails
And in a sentence that would likely bring a knowing nod from some in the trucking industry, building products is said to “overall still operate largely via phone calls and emails with customers.”
Some companies cited in the report as the leaders in the building products field are not exactly tiny. For example, it cites Ferguson Enterprises (NYSE: FERG), with $29.7 billion in revenue in fiscal 2023, and Wesco (NYSE WCC) with $22.3 billion. But the list also includes numerous companies that all have less than $10 billion in revenue.
In addition to the roughly $5 billion on the balance sheet, the Oppenheimer report noted that QXO recently had filed a shelf statement with the Securities and Exchange Commission that could open the door to additional debt financing for acquisitions.
“With $5.120B of cash available and a recently-filed shelf statement potentially affording additional (likely debt) financing, QXO is well funded to make sizable initial acquisitions,” the report said.
Under the company’s risks, the analysts dryly noted the outsize presence of Jacobs himself. “The founder, largest shareholder, chief executive officer, and chairman of the board of directors at QXO happen to all be the same person,” they write.
They add that they are familiar with Jacobs’ “historically successful playbook, and his team tasked with executing it.” They say “the company is in its early stages and concerns of it reaching its full potential would arise should Mr. Jacobs exit his important role prematurely.”
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