Brad Jacobs’ latest venture could be a huge success.
Brad Jacobs may not be a household name among individual investors, but he has one of the most accomplished track records of any CEO working today.
The first company Jacobs founded in the United States was United Waste Systems, which achieved a compound annual rate of return of 55% from its founding in 1989 until its sale to what would become Waste Management in 1997. At the time, the company was the fifth-largest solid waste management company in North America.
Jacobs then co-founded United Rentals, which used a similar roll-up strategy to generate above-market profits and become a leader in equipment rentals.
In 2011, Jacobs bought a truck brokerage company for $150 million, which became XPO Logistics. XPO became the seventh best-performing stock in the Fortune 500 over the decade, rising more than 3,000%. XPO has spun off two businesses, truck brokerage RXO and contract logistics company GXO Logistics, which together generate more than $20 billion in annual revenue.
Jacobs has worked on more than 500 acquisitions in his career and will bring a wealth of experience to QXO as it makes its first deal.
Image source: Getty Images.
Jacobs’ next project
Last December, Jacobs announced his next venture, called QXO (QXO -0.71%), which he plans to bring the same roll-up strategy that has worked so well in other industries to building product distribution.
Like other industries he targets, building materials distribution is a large and fragmented industry with an estimated market size of $800 billion. There are 7,000 building materials companies in North America and 13,000 in Europe. QXO aims to be the industry leader with $50 billion in revenue by the end of the next decade. The industry has been growing steadily at a compound annual growth rate (CAGR) of 7% over the past five years and should benefit from a housing shortage of about 4 million homes in the U.S. and an aging housing stock.
The company raised $5 billion to kick off its operations with one or two big acquisitions, but QXO hasn’t pulled the trigger yet. The company acquired SilverSun Technologies in an effort to become a public company. The initial plan was to spin off SilverSun, but QXO later decided to keep the company.
QXO Playbook
Building materials distribution makes a lot of sense for Jacobs and his team in many ways because the business is fundamentally a logistics and transportation business, and the challenge is moving product in a timely and efficient manner, taking advantage of cross-selling opportunities, and building the network of warehouses and transportation fleet that comes with it.
Like Jacobs’ past businesses, distribution of building supplies presents QXO with an opportunity to disrupt the market and add value through technology. “It’s really ripe for innovation,” Chief Investment Officer Mark Manduca told The Motley Fool.
Should I buy the QXO?
The building materials distribution industry has already produced a number of winners in the stock market, but these stocks haven’t risen in value as much as stocks in other industries. As you can see from the chart below, five stocks commonly considered leaders in this industry have all outperformed the S&P 500 in recent years.
BLDR data by YCharts
QXO hasn’t made any acquisitions yet, so it’s hard to judge the company’s prospects, but Jacobs’ track record speaks for itself, and the chart above is a reminder that the sector has outperformed the S&P 500 over the years.
With a $5 billion war chest, QXO seems likely to make an acquisition or two that could quickly turn it into an industry giant, unlike Jacobs’ previous ventures, which started small.
For now, the stock is risky, but it could soar if the acquisition is well-received. Longer term, Jacobs’ expertise in roll-ups and the building materials business opportunity bode well for the company. Buying stock now could provide a big upside potential over the next few years.
Jeremy Bowman has invested in GXO Logistics, RXO, and XPO. The Motley Fool has invested in and recommends RXO. The Motley Fool recommends GXO Logistics, Waste Management, and XPO. The Motley Fool has a disclosure policy.
