QXO (NYSE:QXO) might not be a stock most UK investors have on their radars. But it has a market value of $12bn and the firm is targeting $50bn in annual sales within the next 10 years.
If it achieves that, a price-to-sales (P/S) ratio of 1.5 is enough to make the share price climb 500% from its current level. As they once said in Sparta, though, the key word is ‘if’…
‘If’
Anyone who doesn’t know what QXO is at this point is probably thinking it’s some sort of artificial intelligence company. But it isn’t – it’s a distributor of building materials.
From its current base of just under $2bn, achieving $50bn in annual sales requires annual growth of around 38% for the next decade. And no business does that without a serious plan.
The fastest way for a firm to grow revenues is often by acquiring other businesses. But this always comes with the risk of overpaying, which can set a company back years.
QXO’s plan is to take advantage of a highly fragmented industry through a series of acquisitions. From there, it plans to help them grow their revenues and widen their margins.
The firm getting bigger creates more opportunities for cross-selling, giving new acquisitions a boost. And it’s also investing heavily in digital order portals, which should help boost profits.
This means there’s significant integration risk and I think a lot of businesses with this type of strategy will fail. But QXO does have a unique ace in the form of its CEO, Brad Jacobs.
Brad Jacobs
Different people are good at different things. And Brad Jacobs is good at growing businesses in the industrials sector through acquisitions and generating spectacular results in the process.
Between 1989 and 1997, Jacobs grew United Waste from nothing to a business that was sold to Waste Management for $2.5bn. This was the result of around 150 acquisitions.
After that, he started a firm called United Rentals. Ten years and 200 acquisitions later, the company had a market value of around $6bn.
More recently, Jacobs took XPO from a $150m business to an organisation with over $17bn in annual revenues. And this happened between 2011 and 2021.
Getting QXO to $50bn a year in sales is the biggest project yet, so there are no guarantees. But the person in charge has an outstanding record when it comes to executing this type of plan.
A P/S ratio of 1.5 is roughly in line with the long-term average for a stock in this industry. So if Jacobs can get QXO anywhere near the $50bn target, investors could do very well by 2035.
I’m a buyer
I’m a big fan of serial acquirers. I own a number in my portfolio and it’s a business model that can generate great results for investors when things go well.
There is always risk with acquisitions, though, and success isn’t guaranteed. But QXO has a CEO with a uniquely impressive track record in charge and that makes it stand out to me.
I’ve started buying the stock in the last week and I plan to keep doing so. My sense is that there’s a lot more to come from this company and I want to be a part of that.
