TIVP077 (Video): QXO (QXO): Can One of the World's Best Consolidators Strike Lightning Again? w/ Kyle Grieve & Shawn O'Malley

24:52It has a really specialized focus that catches some kind of macro tailwind, but that doesn't guarantee that competition will be kept away longer term. And that's why we previously passed on investing and comfort systems, despite the fact that the stock has worked out very well since we first looked at it. Yeah. So as far as personal experience, when I was actually in my early 20s, I worked very briefly as a roofer for both residential and commercial roofing. Now, this was by far the hardest job that I ever had and nowhere close to the highest paying. So I'm very happy that I got away from it and that I'll never have to do it again.

25:26But I definitely did learn a few things about buying equipment specifically for the purposes of roofing. So So I wasn't directly involved in ordering products or anything like that, but I did have to pick up my equipment that would be needed for actually roofing. And this would be from a business that would have been in the same industry as QXO. Now, I remember going to a place in an industrial part of a Vancouver suburb. I picked up things like a cutting edge, hatchet, gloves, utility belt, tape measure, safety goggles, and harness equipment. So you'd end up buying on credit, and then my employer would pick up the tap.

25:56Now, I'm not sure there's a massive difference between this place and maybe somewhere else. But from what I recall, my employer would have had a deal with a specific supplier and then just kind of use them exclusively. So if they had the right relationship with the supplier, then that place would secure my business. Now, since QXO was able to take full advantage of procurement benefits, if they can sell these items at a better price than competitors or even just competitive prices, then that would be a major benefit, specifically if they're able to offer an even wider range of product offerings.

26:26If I had to choose between, you know, going to two places to get my equipment versus just going to one place, then the option with fewer visits is definitely going to win out. So I've expressed some doubts around what kind of moat a business like QXO can truly have, but I do want to hear your take. Are there some competitive advantages that you think can give them special positioning? Yeah, so I think given the non-traditional nature of this business, the moat lies in kind of the execution of its business plan and growth strategy. So, you know, a consolidator can definitely work because they aren't necessarily stealing market share, but just kind of just redistributing it among fewer individuals.

27:04Now, in the case of QXO, I think there are some real synergies. So while I think you're right that it doesn't have the widest and deepest moat, Brad Jacobs himself is probably the real answer to that question. So to borrow Hamilton Helmer's moat named Cornered Resources, I think you're probably going to get the closest answer. So a cornered resource can be thought of as a form of IP. Traditionally, investors assume that IP is something like a pharmaceutical drug that is protected by patents, which make it so that competitors cannot sell a competing product. But a cornered resource can also just be a person.

27:35If Brad Jacobs was working inside of TopBuild, for instance, instead of QXO, and he was running the exact same playbook, but under TopBuild, then he would probably be just as successful as he has been so far, just under a different company title. And that is a cornered resource. The other small businesses inside the roofing products industries aren't Brad Jacobs. They haven't consolidated multiple industries into billion-dollar companies. They don't have the trust of people with deep pockets to run this strategy with zero prior experience. Now, it's very, very rare for someone to deploy$30 billion in just two years' times, starting from zero.

28:08To get that kind of access to capital is very, very unusual. Now, of the 500 companies that he listed in the industry that he's operating in, there's probably zero other individuals who could access that kind of capital on favorable terms. If you look at whether other companies could even consolidate, I would say the answer is yes, but it would be very hard to consolidate at the same level of scale that Brad has done so far. The second advantage I think worth mentioning is scale. So I briefly covered this, but if QXO finalizes the top build acquisition and are then doing$18 billion in sales, they're gonna be spending billions of dollars on cost of goods sold, which they're obviously going to buy from suppliers.

28:45Now, for smaller competitors buying maybe millions of dollars, they're just not going to be able to buy at the same volume as QXO, and they're not going to be able to get the same volume discounts that QXO is going to have access to. Now, gross margins for QXO as of the latest quarter are around 23.6%, and that's up from 21.1 % in June of 2025. Since top build has superior margins to QXO, I can see those gross margins and EBITDA margins continuing to increase once the deal closes and the company's financials are all consolidated. What you're describing reminds me a lot of this concept of sidecar investing, where the idea is you want to be a passenger in a motorcycle sidecar where you're letting the driver do all the work and you're sort of along for the ride.

29:29And in that kind of strategy, the focus is on finding the best drivers first and foremost. And as we said, Brad Jacobs is a pretty good bet to hitch your wagon to, but that also just means there's a lot of key man risk, right? God forbid Jacobs gets sick and has to stop working. All of a sudden you're left with these businesses that are much less attractive to own and probably less valuable without his steering of things. And that creates a structural vulnerability. And in theory, I've always preferred betting on companies like Alphabet or Amazon, where we've seen a more proven culture of innovation and success that extends beyond any single leader.

30:06Even if people like Bezos still come to mind despite the fact that he doesn't have the same role in the company that he wants to. So that would be my big question. Maybe Brad Jacobs can drive out performance for a period of time, but truly no one knows if that will be two years or two decades. And so I'd want to know whether you think these advantages can persist longer term, thanks to the culture that Jacobs has created and any successors that he's been grooming. Yeah, absolutely, Sean. And I generally like to focus on where a business of QXO size will be in just three to five years. You know, if it's still doing well after that period, maybe continue to layer on another three to five years.

30:46But looking out 10 years is a little bit tough. And given Brad's history, you know, as someone who kind of tends to move from one project to another, he tends to be someone who leaves a business and that business continues to do well. I mean, XPO is still around, waste management, which eventually got sold, got folded into a business that's still around. So it's not like these businesses are just crumbling after he leaves. So right now, obviously, QXO is his primary focus. And given his age of 69, this might be the last area of focus that he ever does before he wants to just retire from generating more and more billion dollar businesses.

31:20Now, QXO says it expects to reach this$50 billion sales target over a 10-year period. And that started in about 2024. But they're already about a third of the way there. So in five years,$25 billion seems quite doable. And considering the fact that once the top build acquisition closes, they're going to be doing$18 billion in revenue. Now, you could probably get to$25 billion with just one more similarly sized deal or a deal that's the size of Kodiak. Or perhaps he just focuses more and more on some of the smaller deals. It just all depends on M &A execution. And obviously, there's going to be a huge amount of deals on the pipeline.

31:56And depending on the size of those, he might need to make more deals, he might need to make fewer deals. But you know, simply put, I think just the whole M &A framework is just something that Brad is very, very good as he's made over 500 M &A transactions over his entire career. Now, the other potential issue that could arise while he scales up is simply what is happening in the home building and remodeling industry. So, you know, if people aren't building new homes, or if they feel like they just don't have the financial robustness to invest and upgrade their own home, well, then a business like QXO would obviously have some headwinds.

32:29And these are maybe hopefully for them shorter in nature, but you never know. You know, when you look at these cycles, they tend to normalize over longer periods. And given the fact that these businesses do generate cash, they should hopefully be able to handle some of the cyclicality of the industry. And unlike NVR, which is a business that, like you mentioned, we previously covered, they actually don't need to spend any money on any lots or property other than on their branches to just run them. The cyclical businesses don't mean that you can't approximately model their performance longer term, but it certainly makes the timing tougher, especially when you layer key man risk over that cyclicality.

33:06And given that QXO has deployed billions of dollars on two acquisitions, now soon to be three, I think we should probably closely examine their debt situation to see how they're financing all of this. And what does that look like now? And where do you foresee this going in the future as they continue to heavily lean on M &A to reach that$50 billion revenue target. Yeah. So I think it's vital to take into account QXO's debt situation because while the business is obviously already generating cashflow, and while I think that number will increase over time, the 100 % are going to need to fund these new deals and they're not going to be able to fund it from purely internal cashflow.

33:42So the fact is they're basically scaling up from zero. So with that in mind, you pretty much have to rely on borrowing from others in order to fund more and more deals, especially if they want to scale up as fast as they're planning on doing. Now, as of the last quarter, QXO has about$3 billion in long-term debt, and this debt is split into two segments. So the first one is senior secured notes. These notes were issued as part of the Bequin acquisition for about$2.25 billion, and they carry an annual coupon of 6.75 % interest. This debt is recourse debt backed by QXO's assets. These payments are semi-annual, and they're going to cost QXO about$76 million or so every six months, not including the principal repayment.

34:20The second is a term loan facility, which has about$825 million left on it and has interest rates of about 5.7%. Interest payments on this loan are going to be about$47 million annually. Now, this brings debt servicing expenses to about $200 million annually. And as of the latest quarter, QXO is generating about$280 million in cash from operations on a run rate basis. So right now, nearly all of the cash that they're generating is going to be put into servicing debt. And this doesn't include things like maintenance CapEx, which is pretty hard to estimate given the additional CapEx requirement as they continue to scale.

34:53CapEx for the last quarter was$22.5 million, but it's hard to tell how much of this was maintenance versus growth CapEx. All that debt and the interest on it obviously puts pressure on profit margins unless they can use that debt to grow rapidly where they may be able to then achieve some operating leverage. But that's a sort of a risky form of speculation to undergo that, right? If things don't work out as well as hope, margins could be significantly worse than expected too. And that's just how leverage works. And so, you know, I tend to get more excited about the operating leverage that we see in software businesses and some of the companies we own like Uber and Reddit, because the incremental costs of serving more customers is quite low, right?

35:37For adding another account on Reddit, it doesn't cost them very much for somebody to create a profile there. So margins can inflect dramatically as the business grows, as the number of users of Reddit explodes without them needing any debt at all to facilitate that. And so this is another way to think about operating leverage and one that is, well, literally more leveraged. But another important question here is the current debt situation is based around QXO's first two acquisitions and doesn't include top build. And that's certainly going to further expand their liabilities and muddy up the picture here.

36:15So how concerned are you about that? This company might get to$50 billion in revenue, but it might also need to carry a huge amount of debt in doing so. Yeah, that's a completely valid point there, Sean. The$17 billion price tag on top build is going to be partially funded in QXO shares, which is great for not adding debt, but obviously there's going to be a significant amount that's going to be broken down. So first off is that there's going to be a new debt of about$6 billion. The exact terms of this haven't been disclosed yet, but QXO has a commitment from lenders. So I presume the terms are probably going to be somewhat similar to the term loan facility that they currently have.

36:56Second is that they're going to have a drawdown of about a billion dollars in preferred stock. So this preferred stock pays a 4.75 % annual dividend yield and was part of QXO's earlier financing. So they didn't have a need to fully draw down on it until now. And third, they do have some cash on hand of about$2.1 billion. So this represents about two thirds of QXO's current cash and cash equivalents position. So with that, I get pro forma debt of about$9.1 billion after the top build is completed. That is no joke. I mean, we're talking about a really highly levered business here. And it just has me thinking of Buffett's first rule of investing, right?

37:33Don't lose money, right? Because that is the one thing you can do to interrupt your compounding. That's the most important thing we can do as investors of our lifetime is to compound. So of course, you can't guarantee that a stock's price won't fluctuate over a period of time, but you can minimize your exposure to businesses that have a higher chance of going bankrupt, where effectively your investment then goes to zero. And that is a huge setback for your compounding. With the point being, if a company has no debt, there's no at least immediate way for the company's stock to go to zero. And that's not the case here though.

38:10So not that I would want to short QXO, but again, you're taking on higher risk. And accordingly, I would probably want to demand an even higher hurdle rate to invest in this company. But we could talk about that more when we get to the valuation section of the business. But that's just how I think about things. It It doesn't mean it's uninvestable. But if you normally look for opportunities that you think can plausibly generate 12 % returns annually, like we do on average over a five-year time horizon or hopefully longer, you might raise that threshold, that hurdle rate, to 15 % to 20%, reflecting that you need more compensation for taking greater risk.

38:47And when you buy high-quality software compounders with no debt and maybe a modest premium multiple, that's sort of how we've approached things with a lot of businesses in our portfolio. Yeah, you might get slightly lower expected returns, but it's generally a more attractive proposition to me than swinging for higher risk, but higher possible return bets where there's this possibility of zeroing out, right? With Alphabet and Uber and Airbnb, we know that we're not going to zero out the investments. And with QXO, I don't know how likely that is or not, but it is certainly more of a possibility.

39:23But I assume the counter argument is that the top bill deal will add considerable cash flow to QXO to help service this debt and offset some of the leverage that was being used here. Yeah, that's exactly right, Sean. So QXO has modeled for the post-acquisition adjusted EBITDA to be about$2.1 billion. So that's a fair amount of cash that they're going to be generating. Now, this puts them somewhere around the four and a half to five times net debt to EBITDA multiple. Now, like you just have been mentioning here, it is pretty high. I generally prefer to stick to three times and lower is even better.

39:58Now, my assumption is since they have this$50 billion revenue goal, they will continue to layer on more debt, but will also continue to generate more and more cash flow. Now, once this business gets to$50 billion in revenue, there's definitely some questions to ponder. Will they slow the acquisition down and focus on leveraging? Or will they make a new goal? Maybe it's$75 billion in revenue or$100 billion in revenue. It's pretty hard to say right now. But another note to focus on is that QXO has already diluted shareholders. But when it comes to dilution, Brad is very, very intentional about its use.

40:29So in his latest book, How to Make a Few More Billion Dollars, he mentioned that he's not averse to dilution as long as it generates the right amount of shareholder value. He said that he's gone from owning 90 % of a company to just 10%. But because of all the value that was added from the dilution, his 10 % stake was worth significantly more than the original 90%. So if you are expecting this business to be some sort of share cannibal in any way, like NVR, a business that we previously discussed, I'm afraid you're going to be sorely disappointed. But as Brad mentioned here, there are just many, many ways to raise capital.

41:04And as long as you use shares to add value, it can work. Now, one of my favorite examples of this is Henry Singleton and the business that he ran called Teledyne. So Singleton used overpriced shares of Teledyne to go on an absolute M &A spree, but they were highly dilutive to shareholders as total shares outstanding actually swelled by nearly 14 times. Now, that sounds pretty bad, right? But you also have to account for the fact that Teledyne grew its EPS by 64 times at the exact same time, which meant that even though he was diluting shareholders, he was clearly creating a ton of shareholder value.

41:38That's a great point because as much as it's tempting to use heuristics, we can't simply say that an expanding or contracting share count is objectively good or bad, right? You know, broadly speaking, we tend to think companies that are able to shrink their share counts over time tend to be more shareholder friendly and thus are perhaps theoretically better places to invest, but that's not guaranteed. If you're buying companies that below their intrinsic value while issuing equity at a price that's above your company's intrinsic value, well, the long and short of the math that goes into that is that it's a good thing to do.

42:13You're creating value for existing shareholders, even though you're issuing shares, right? And Henry Singleton is the perfect example of how to balance that well. And since you mentioned Singleton being one of the greatest capital allocators of all time that he is. Let's shift our focus to capital allocation more and how you view QXO's abilities in that area so far for as much as we can tell for a company that's, you know, what, two years old. That's right, Sean. And that's the hard part, right? You know, QXO is kind of tough to really analyze just because it has this very, very brief history.

42:50So, you know, I think we kind of have to rely somewhat on Brad's history as a capital allocator to find out whether the current acquisition vehicle in QXO can continue to deliver shareholder value. So if we look just purely at QXO, the numbers just aren't helpful because they don't even really include a full year of the two businesses in the consolidated financial statements. So if we look at my personal favorite metric of ROIC, the numbers are just simply bad, simply because Jacobs is intentionally buying businesses that he believes have depressed margins that he and only he can really unlock as part of being part of QXO.

43:24So the numerator of the ROIC calculation is going to be severely depressed right now. Once we have at least a full year of consolidated numbers for Beacon and Kodiak, we will have some idea of how margins can improve and whether that capital is being allocated well. And a year probably still isn't good enough. I'd probably be a lot more comfortable with a business this size and having maybe two to three years, probably three years of history. But my assumption is given how successful Brad has been in the past, I think he's probably going and continue to allocate capital very, very well. But it's just not something that's going to be very obvious to investors until a few years from now when the business is more or less in some sort of steady state and has a more accurate and normalized margin profile that won't be so volatile like it is today.

44:09Now, as of now, they've invested about$13.6 billion in the company. And with no post synergies of about$333 million, we get our ROIC of only 2.4%. If we remove Goodwill, we get 4.3%. Now it's important here to note that QXO is nowhere close to where it wants to be in terms of margins. So if they are able to realize those synergies, I would expect their ROIC number to continue to go up. So with all that said, I think it's definitely a number worth monitoring in the future. And the hope is that it continues to rise as they're able to realize more synergies, procurement advantages, and tech-related advantages as a consolidated company.

44:45But for now, we kind of just have to wait and see. It's definitely too early to put a ton of stock on those ROIC numbers. So to me, the important qualitative question to reflect on is what kind of reinvestment opportunities does the business have going forward that's going to drive those ROIC numbers over time? Yeah. So given that Jacobs wants to go in and use his abilities to improve businesses through technology, improve procurement and integration, there's definitely some room to continue to reinvest in the business. But my guess is that most of the capital invested in this business is going to be inorganic in nature.

45:21With Top Build, they specifically said that the business has a good mixture of organic and inorganic growth opportunities. So we will see just how good QXO is optimizing margins. And we'll also see where he thinks reinvestment is going to have the best returns in the near future. What about some of the deals that QXO has passed up on? That's a great way to view Jacob's capital allocation skills, as well as the discipline in only getting deals that make the most sense for QXO shareholders. Yeah, I think that's a great point there, Sean. So one business that QXO went for was Gypsum Management and Supply or GMS.

45:54So they ended up bidding about$5 billion for that business or about$95 per share. So this business is located in Georgia and operates about 320 distribution centers offering products like wallboards, ceiling, steel framing, and other construction-related materials. It also has 100 additional locations for tool sales, rentals, and services for residential and commercial contractors. However, Home Depot came in with a bid of about$110 per share, and Jacobs just didn't really budge on his price. So the winner of that business went to Home Depot. Now, another bid that Jacobs made was for a France-based business called Rexel SA for$9.4 billion.

46:31This was way back in September of 2024. Now, this is interesting because I think this business gives you a profile of what a lot of businesses inside of that industry look like. So Rexel currently has financial targets of revenue growth of about 5 % to 8%. And that growth was expected to come about 60 % organically and 40 % from M &A. Their target for margins was to basically exceed 7%. Now, Rexel has done a pretty good job since the bid was made, increasing EBITDA by nearly 43 % and EBITDA margins by 43%. Now, this has caused the share price to rise about 38 % as well. So it looks like management's decision to just hold off on selling was probably a pretty good call, at least for now.

47:14Now, it's worth noting that this business is located in Europe, which would have opened up a significant opportunity, I think, for QXO to penetrate into Europe. Now, it's also telling that Brad essentially wants to double the EBITDA margins of QXO compared to this business. So just to give you an idea of what Jacobs was able to do with XPO, when he took over, EBITDA margins were about 1.7%. When he left as CEO, they were 10%. So he stuck around as chairman for a few years after and XPO sported margins above 14 % by the time that he vacated this chairman spot at the end of 2025. So I think this paints a pretty good picture that Jacobs has a good history here of increasing margins in industries that just don't really seem to have that much innovation embedded inside of them.

47:57And he's also shown discipline as a capital allocator and M &A for QXO shareholders. It doesn't look like he's interested in getting into things like bidding wars, and he knows exactly what he wants to pay. And he isn't really willing to budge on that number if the deal just isn't right. And I think I highly respect that. The only thing I'd want to mention with the French deal they looked at, while it does expand the TAM, you lose some of the synergies that might have made your domestic operations more efficient and therefore more profitable, right? There could be some supply chain delivery advantages, but last mile delivery in Georgia, for example, that's not going to benefit at all from the acquisition of a French business on the other side of the Atlantic Ocean.

48:36But that's just my two cents there. But you teased to the audience earlier in this episode that QXO does have a TAM of about$800 billion, which does sound like a very large runway, if true. And I imagine that includes Europe and generally. How do you think about QXO's$50 billion revenue goal and whether it's even realistic for them to achieve within the context of that very large TAM, assuming that they can capture a good chunk of it. Yeah. So there's a few ways of looking at this, Sean. First, you can view it from a forward looking basis. So since the top build acquisition looks very likely to happen, you can look at how long it will take for QXO to achieve their post synergies revenue and margin.

49:20And then you can look at how much growth they'll have between now and when they realize these full synergies. Second, you can look at what the TAM is and if QXO is correct on its number and how much market share they can take. Then you can just kind of work backwards from there using their margin goals and then you can get a general idea of cash flow from there. So let's first look at the top build acquisition. I already discussed how that will impact the business and some of the future targets that they're modeling for. So just to refresh your memory, they're targeting revenue of about $18.1 billion.

49:49EBITDA margins around 12%. And this gets QXO to about$2.17 billion in adjusted EBITDA. So if we compare this to where they are today, you're looking at some incredibly hefty growth numbers. So on an absolute basis, that's 52 % revenue growth. Now doing that instantly once the deal closes is going to be quite the windfall. But the increase in margins is like rocket fuel for this revenue growth as adjusted EBITDA is modeled to increase by 110%. The argument here that an investor could make is that the post-acquisition assumptions are just too aggressive. But when you do the math, it does seem to work.

50:21And even though top build is already a good business, QXO believes that they can add an additional$300 million of adjusted EBITDA by 2030. This brings a purchase price multiple down to a touch below 12 times if these synergies are realized. Well, for them to model QXO doing twice as much revenue, but generate roughly the same adjusted EBITDA as top build, They must be acquiring a much more profitable business or underwriting some fairly aggressive assumptions around synergies. That's just my initial reaction. And I'm sure it's a mix of both, but maybe my guess is that the latter is doing more work there than the former.

51:00And yet though, you're just sharing the potential for QXL from one acquisition, which does sound very promising. So if this is as good of a deal as it actually sounds, Do you think it's reflective of the acquisitions that they can continue to make in this industry going forward? Yeah, so QXO does seem to be increasing its TAM as they continue to add these new businesses, simply because they're just adding these incremental business lines to their existing business. Now, this allows them to increase their product offerings and cross-selling opportunities. And as they continue to layer on more and more of these businesses, I think the chances are pretty good that maybe that TAM will continue to grow as they find these adjacent products and services to offer current and future customers.

51:40Now, another way to look at it is how their product offering has shifted as they layer on these acquisitions. So first of all, you had Beacon Roofing. This made them the largest publicly traded business in roofing and watering products. Second, you had the Kodiak deal. This added lumber, trusses, and other exterior products and expanded their geographic footprint in some of America's top markets, like I mentioned in Texas and Florida. Now, the third growth layer is from TopBuild, and this helps them expand their product offerings to include items such as insulation while continuing to strengthen their position in roofing and waterproofing.

52:08So where as QXO started as a business offering, just kind of roofing products and services, which tends to be earlier in the real estate build-out phase, they're now able to create a full product offering across all stages of a build. So this means they remain even more competitive in their product offerings as they'll be able to leverage a single Salesforce to procure for a larger area of a customer's entire project rather than dividing this process into separate parts where a company cannot take advantage of those exact same scale effects. Now, as for the numbers on QXO's provided TAM, from what they said, that is a global TAM with their three acquisitions being based in North America.

52:45The current TAM inside QXO is more like$300 billion, which they share in their own filings. Now, once they land an acquisition outside of North America, such as in Europe, that will increase their TAM and maybe get them a little closer to that$800 billion total market that they mentioned. Now, I don't know if that market also includes Africa and Asia, but that's the number that they gave for the TAM. But it's worth mentioning this, the market is highly competitive. And as I discussed earlier, businesses like Home Depot and Lowe's are also very involved in M &A. So I doubt QXO ever becomes a monopoly, but their ability to simply roll up a small part of the industry should make for a highly profitable business with all the advantages that they're going to be able to offer to their customers.

53:27If they can get to that$50 billion mark, that would just represent 6 % of global TAM. Now, that's a very, very big number, but QXO doesn't even really need a ton of deals. If they can find more beacon or top build size deals just to get there. They don't have to add a ton of customers in this kind of slow, organic way. They can just basically acquire them through M &A. And this allows them to scale much faster than any business attempting to do so organically could do. In terms of hidden monopolies, were there any other advantages that you were able to come up with that might not be so obvious that can help build customer loyalty and lock in customers into using QXO's products?

54:05Yeah. So I ran this thought experiment, but the Moat Score index for QXO was quite low. Now, this is a business that just isn't going to have the most loyal customers. Customers will tend to stick with their supplier, but if they find someone else who's offering a better price or a better service, there isn't that much of a reason for a customer to stay loyal to one supplier. So for this reason, I had them with a Moat Score index of about seven, which is very, very low. But given the industry that they're in, this is not at all surprising to me. where QXO does have some power is in their ability to help customers in a wider variety of their needs.

54:37So if a customer can work with QXO to address multiple needs at, let's say, the same price, rather than going through three different distributors for similar products, it just makes it more efficient and less time consuming to take the QXO route. QXO can further enhance this benefit by offering their customers a better price and an even better service, which yes, would probably make it a little bit harder for their customers to want to switch to somebody else. But it's still very early in the game to make this assumption. I think that as these acquisitions are integrated, we'll probably get a better idea of how the relationships with customers will change and hopefully improve over time.

55:13Let's transition this conversation over to look a little more closely at management. You've already spoken at length about Brad's previous accomplishments. I think it's obvious that he's a very skilled creator of shareholder value. So let's go over how management is compensated and what their incentives are. Yeah. So part of what I like about QXO is in its aim to get to this 50 billion revenue target and 7.5 billion in EBITDA. I think this helps keeps management really focused on the long-term and avoid making any splashy deals that would harm the business in the short term. This might include making a deal just to increase the top line while just completely ignoring that the business doesn't offer the right synergies or maybe even have very limited margin expansion opportunities.

55:55So right off the bat, you have this 10-year investment horizon, which I think is very, very good for long-term oriented shareholders. Now, I'd like to start here with base salaries for executives, as I think this is a really good starting point to see whether a business is spending money wisely on the people who are in charge of creating shareholder value. The good news here, the base salaries for all executives don't really indicate any wasted spending. All executive base salaries are in the$450 to$900K range. Incentives, however, bring total compensation up very, very substantially. So not so much in 2025, but a lot more so in the first year in 2024, when Brad Jacobs total comp was$189 million.

56:31And the CFO had a comp of$37 million. Now this is quite high. But often in these newer businesses, they do this to help get some executives skin in the game to help align them with shareholders. Okay, so the next step is to figure out how they're going to earn this compensation, which is mostly coming from stock awards. Are they coming from what Sean likes to call corporate participation trophies, which just kind of means sticking around long enough to get your options? Or is management being forced to really, really earn those stock awards? So there's a few parts to this. So if we look at the stock awards, they're based on time-based restricted stock units or RSUs.

57:06This vests annually until 2030. The performance stock units, PSUs, are tied to total shareholder return. So QXO must stay above the 55th percentile to unlock 100 % of their rewards, which scales up to 225 % if they are in the 90th percentile against the S &P 500 index. The first tranche of PSUs was awarded at the end of 2025, so executives received the maximum option to lot me. The short-term incentive program is one that I like a lot more, which is based purely off of performance and based on just two metrics, company-wide adjusted EBITDA targets and company-wide revenue targets. For fiscal 2025, the company didn't achieve the adjusted EBITDA target.

57:44It did reach 95.4 % of the revenue target, but the compensation committee decided to reduce the payouts to all execs to zero simply because the adjusted EBITDA target was not met. Now, I like how they did this as I think it is a good signal that they're very, very focused on holding management to a very, very high level of standard. Yeah. I mean, it is good to see that they're withheld the payouts when the targets are not being met, right? That is definitely reassuring, but it's also not a perfect scheme. Maybe I think about things too simply, but for QXO to stay above the 55th percentile in total shareholder returns relative to the S &P, going to lock 100 % of their bonus, I mean, that doesn't strike me as being hugely ambitious.

58:28And then there's the stock-based participation trophies that we've called it. And that doesn't help either from my vantage point. And you've got a short-term incentive program where honestly, I'm not sure that these should even exist philosophically, not to get on my a high horse, but I'm just not convinced that base comp and intermediate to long-term incentives aren't enough. Why are short-term performance incentives even needed at a really high level? And then having these based on revenue targets and adjusted EBITDA short-term, I don't know. I'm sure they have a good argument for it. I'm not an expert in management incentives, but you should really be focusing on longer-term earnings per share growth.

59:09And to me, anything that potentially distracts from or complicates that is not a good thing in my book. But now that we've covered the incentive program, let's turn our attention to insider ownership, which I think we should always pay close attention to. Yeah, Sean, and I think you'll be a little bit happier with this part of the narrative. So insider ownership is very, very good, particularly Brad Jacobs. So he owns 35.7 % of the common shares and he owns 90 % of the convertible preferred stock. So with other insiders, the ownership goes up to 41%, which I think is very, very good insider ownership.

59:44Now, there's definitely a few other things to consider here. The first is the convertible preferred shares. So Jacobs, through control of Jacobs' private equity, invested about a billion dollars into QXO early on. Now, this is quite a strong signal for the CEO to be investing that much money into his business. So Bloomberg, as of May 25th of 2026, lists Jacobs' net worth around$15.7 billion. So according to that, he put in somewhere around high single digits percentage-wise of his net worth into QXO. Another important point on the preferred stock is that it's convertible. So this means that if the shares are converted, there's going to be significant dilution in the future.

1:00:21One preferred share once converted is worth about 219 common shares. So if 100 % of the shares are converted, which seems quite likely as the conversion price is fixed at$4.56, sense, it would meaningfully add to the shares outstanding, but they are in lockup up until 2029. With QXO total shares outstanding today of about 744 million and another 492 million shares that could be added through the convertible preferred stock, mandatory convertible preferred warrants and stock-based rewards, there's a very high likelihood that shares are going to be diluted heavily in the coming years. Now, if Jacobs comes through on his ability to add value despite the dilution, it could still work out for investors, but just understand that there is most definitely dilution risk embedded in QXL.

1:01:05There's something to be said for skin in the game, but I already didn't love the incentive structure. And now you're outlining the very real and very substantial dilutive costs of those incentives. But it probably does give me some hesitation. And we do need to see the whole picture before we make any judgments about whether QXL is deserving of a spot in our portfolio or watch list. So how about we shift gears and just get idea of QXO's competitors and the competitive landscape that they operate in, right? It's one thing to say that the TAM is big enough for them to meet their long-term goals.

1:01:38And it's another question entirely as to whether the competitive dynamics also lend themselves to that too. Yeah, agreed, Sean. Luckily, we can see from businesses like Top Build that there are some businesses with really high margins. And then there's some businesses with lower margins, such as Beacon, which is in the high single digits. Now, another really good comp would be a company like Builders First Source. So I recently road tripped down to the Oregon coast with my wife and son. And on the way down, I was just amazed by how many Builders First Source trucks I came across. My son had a blast just pointing them out to me as he's very heavy into the truck phase right now.

1:02:13Now, for those unfamiliar with Builders First Source, they are what I would consider a direct competitor of QXO. They basically manufacture and sell building materials, manufacture components, and construction services to professional home builders, subcontractors, remodelers, and consumers, but only in the US. Now, the business has some similarities to NVR, which Sean and I recently discussed, in that they both had incredibly elevated revenue margins and earnings back in 2022, and have had a lot of weakness, I guess you could say, ever since then. Now, I think given that data, it's clear that right now it's probably a really good time for a business like QXO to scoop these businesses up while they have these depressed fundamentals.

1:02:51The important part about a business like Builders First Source is to look at the margin profile. So during the post-COVID building boom, margins expanded all the way up to 19%. But as of now, they have slowly receded all the way down to 8.2%. So the fact that QXO has adjusted EBITDA margins that are similar is a telling signal that they hopefully, maybe, expect to have some organic growth in the future once that demand returns. But the Builders First Source case study also tells us that there's definitely some cyclicality in the industry. If you're exposed to new builds or renovations, which QXO is more focused on, there are cycles of when people are more or less likely to renovate.

1:03:29And if there are recession risks, people are going to just be a lot less likely to build or renovate, which obviously creates a lull in businesses that are in the construction industry that I think we are seeing today. But when you look at the remodeling industry, the stats seem to be quite a bit better than for new builds with a steady rise all the way since the early 2010s. Since we're on the topic of cyclicality, I think this is a good segue to discuss risks in some more detail. What kind of risks do you see in QXO, both in terms of its industry and also in terms of their operations and business model?

1:04:04Yeah, so I think I've already harped on the industry here, as well as some of the risks associated with being exposed to the building and remodeling industry. But it's worth reiterating that even though the remodeling industry seems to carry less risk than new builds, there's always going to be some sort of risk if homeowners are just unwilling to invest into their own homes. Now, as for the other risks that I want to get into, there's kind of three different ones. The first one is execution risk, the second being key person risk, and then third being M &A. So execution risk is, in my view, the largest risk for this business.

1:04:35Since QXO is trying to execute a pretty audacious vision for this$50 billion revenue target, this is just a lot of moving parts that must align for this vision to play out. QXO has only made two acquisitions that are currently being integrated with the third more of a risk for Q4 of 2026 and then 2027. Now these integrations not only take time and energy, but as an investor, it can be really difficult to just estimate how long it's gonna take for the integration and optimization process to really, really take effect. If you judge QXO based on current numbers, I think it's quite clear that the business model is working, but it's still at a very, very early stage.

1:05:11Revenue, for instance, is scaling incredibly well due to the acquisitions. The last quarter has revenue of$1.7 billion versus$13.5 billion in the prior year's quarter. But since the business is focused on expanding margins, things get a little harder to understand. So adjusted EBITDA margins just inflected to being positive at just 0.1 % versus negative 66.7%. But much of this is due to transformation, transaction, and restructuring costs. Normally, for a business that isn't acquisitive, I'm okay with these numbers being added back in as these can be perceived as a one-off expense. But for QXO, which I think is going to continue to buy other businesses, I see these cash outlays as ones that are going to probably persist as long as they're executing on their business model.

1:05:54Now, when you get into key man risk, Brad Jacobs is still quite sharp from the podcast that I've listened to him on. So even though he's 69, I think he's still in very, very good shape and he clearly loves being involved in business. But if we played a thought experiment, removed Brad Jacobs from the equation and replaced him with someone else, let's say tomorrow, well, then I think the outlook for QXO substantially changes and not for the better. Jacobs brings expertise in M &A, financing and integration that is very, very difficult to match. The simple fact that he's invested in this is what I would assume is a big reason that he was able to raise so much capital to fund QXO.

1:06:29And this is an advantage that, as I mentioned earlier, is just not easy to replicate. I highlighted that key man risk as being one of my bigger concerns earlier. And near the end of the episode here, it seems that we both still see that as being one of the biggest operating risks for investors. And I guess we're in agreement there. Well, I think it's that time of the episode here to discuss the value of QXO and whether we want to add it to the intrinsic value portfolio that we manage every week on this show. Every company we look at, we look at through the lens of whether we'd like to add them to this portfolio of 15 to 20 companies that we manage.

1:07:06So why don't you kick us off with thinking about the base case for QXO as we try to underwrite its intrinsic value? Yeah. So QXO is a very interesting opportunity. On the one hand, their goal of getting to$50 billion in revenue in a decade has to be one of the most aggressive growth assumptions that I've ever seen, seeing as their base was essentially zero. So just keep this in mind for all cases that my revenue growth number is quite a bit higher than most businesses that I've looked at simply because I'm buying into the fact that by the terminal year, he's probably going to be somewhere around his halfway target of$25 billion.

1:07:40So in the base case, I'm assuming that the business continues to grow via acquisition and organically via synergies. This results in a 35 % revenue growth. Now, even with this assumption, I'm still not giving them the$18 billion in revenue that they think that they can get post synergies, which I would assume is going to happen somewhere around 2027. but I assume that they reached the halfway mark somewhere in 2029. Now, it would only take probably three to four more acquisitions over the next five years to meet my revenue growth targets. And given how quickly QXO has been doing deals, this seems quite likely to me to happen.

1:08:13The question is, will QXO get more Kodiak-sized deals or more top-build-sized deals? My assumption for the base case is that they're able to reach 15 % adjusted EBITDA margins through synergies. And even though with top-build having margins of around 18%, I think this is pretty reasonable. It just means that they may have to look at higher margin acquisitions, or in the case that they're able to really expand the margins of businesses like Beacon and Kodiak, perhaps they can find more lower margin businesses that they can help optimize as part of the integration process. A few other assumptions are that the business continues to maintain significant leverage.

1:08:46As they begin to have more stable cash flows, they may be able to secure more bank financing and rely a little less on equity financing for future deals. But I'm still assuming four times debt to adjusted EBITDA ratio in the base case. I also assume shares are going to be diluted probably by about two and a half times the current number. I then apply 15 times multiple and keep in mind the top build has at times flirted with 18 times and its average has been around 14 times. Now, given that QXO is likely to grow much faster than top build, I think this evaluation is decent. Now with a 20 % margin of safety, I'm getting about a 6 % return with a share price of$28.

1:09:23So let's move to the downside and look a little bit more into your bear case scenario. Yeah. So I have to admit it felt very weird using a 20 % revenue growth target for a bear case, but my assumptions here on revenue with that number is still that by 2030, the numbers a touch below what they believe the top build post-Synergy number is going to be that they posted. So I still think this is pretty bearish if they just can't even get to that number four years after the acquisition is complete. So I'm assuming here that the synergies just don't pan out anywhere near as good as they think. I'm also assuming that they fail to make many new acquisitions during this time span.

1:10:04This scenario assumes that they have difficulty finding many more deals as well. The M &A process, as someone who loves serial acquirers, I know that these can be very, very lumpy, which means some years you have a lot of action and some years you have no action or very, very little action. We also have to consider that there's also other very, very deep pocketed companies out there that are going to be competing on M &A. So in this scenario, I basically assume that they have a very, very large lull in their acquisition pace. Now, the lack of synergies also is going to affect things like their adjusted EBITDA margins, which I assume continue to expand very, very moderately to about 12%.

1:10:40I assume they take on even more debt in terms of their leverage ratio because they have their cash growing at a lower rate and their shares are going to be much cheaper, making it more expensive to fund new deals. So I apply about a five and a half times debt to adjusted EBITDA ratio. And lastly, I'm assuming that they're going to need to be a lot more aggressive in share dilution. If they aren't growing as fast in order to reach their revenue goal, investors are going to be a lot less interested in holding shares at a high multiple. And therefore, future deals are probably going to be unfortunately even more dilutive to shareholders.

1:11:10So in this case, I'm giving them an 11 times EV to adjusted EBITDA multiple and I get annual returns of negative 23 % with the margin of safety and a share price of just$5.50. If debt gets this high and is sustained, there would be a lot of risk that QXO's assets would maybe need to be sold off with proceeds going to the debtors, which clearly impacts the terminal value for equity holders. Now, I didn't assume this in this scenario, but I thought it's worth mentioning. So with the shares being this low, in a bear case, there is a chance the owners of the preferred shares may wait to convert, which would at least help increase the value of the shares there on the margins with maybe a little bit less solution.

1:11:48But the math gets complicated. It is a pretty bleak bear case that I think you have painted here. So maybe we can flip the switch and look at the bull scenario. What's this business worth if things go perfectly and they continue finding accretive acquisitions that offer great synergies? Yeah. So for the bull case, I assume that they track their 50 billion target by 2034. So by 2030, I think revenues are somewhere around$36 billion. This assumes that they're able to compound revenue at 40%, which is an incredibly high number. Now this revenue is going to be mostly carried by M &A, and I'm assuming the integration process works even better than expected.

1:12:26So I'm assigning a 16 % adjusted EBITDA margin. With the acquisition of top build and the added expertise of how they're able to reach such lofty margins, it's not out of the realm of possibility that they can then apply certain best practices across all of QXO to help continue expanding their margins. I also assume everything goes nearly perfect on procurement advantages as well as technology and cross selling. Now to get this revenue target, they probably need another five to eight acquisitions. Again, it's kind of hard to estimate these things given that they're gonna have a wide range of values on their acquisitions.

1:13:00Obviously with the actions they've made so far, you got one being about$2 billion and one being about$17 billion. So again, hard to know. It could be a small number of really, really large ones. It could be a larger number of smaller ones. Either way, I assume the top build acquisition works out perfectly and they're able to double revenue over the next four to five years. Keep in mind that as this business scales, they should get even better margin expansion from economies of scale and cross-selling. especially if they're going into new adjacent markets. So for this scenario, I assume that their debt to adjusted EBITDA ratio decreases to three times.

1:13:31And this is because they simply have more cashflow and a more expensive share price, which allows them to get a lot more creative with financing future deals. I still assume the share count will increase, but less so than the bear and base case. So I assume they go up by about 2.2 times by the terminal year. As a result of the exceptional revenue growth, the expanding margins and the deleveraging, I assume that they get a multiple somewhere around top build high end of about 18 times EV to adjusted EBITDA. Now this offers a 21.6 return on a share price of a little over$55. Now CoStar would be an interesting business to contrast QXO's margins against in a bull case.

1:14:07But overall, I do think I'm much more bullish on CoStar at the right price than QXO, even if there's some value uncertainty around the spending that they're doing on homes.com, but CoStar has a really well-proven business model for the most part, whereas QXO needs to prove itself to long-term shareholders still. And so how about we go full circle and bring these numbers together? What do you think the company's intrinsic value is in a specific number and how attractive is it at these praises? Yeah. So I mentioned earlier here that I am using a margin of safety number. I chose 20%. Now, as for the weighings of each case, the bear case is at 35%, the base case is 50%, and the bull case at 15%.

1:14:49Now, with these numbers, I get a price target of about$21.35, which offers about a 5.1 % return per annum. Now, my assumption here is that QXO bulls are going to think that my assumptions are just way off, and that's totally fine. But with my understanding of this business and my circle of competence, I'm very comfortable with these numbers. My suggestion for me would be to skip this business as an addition to the intrinsic value portfolio. and I have kind of two reasons for that. The first one are that just the synergies are hard to come by. I understand Jacob is a master at this, but I just, I kind of have to discount a little bit simply because the industry is just cyclical.

1:15:26That's just the way it is. And getting synergies that they think they can get is going to be a lot harder to achieve in reality. And even though I think it's possible they get them, I just don't really feel like I have the current data necessary to really get conviction of whether it's going to work out the way that they've outlined. The second is that just the business is really hard to evaluate in terms of capital allocation. You have to kind of put blind faith that Jacobs is doing the right thing. I got a chance to have a brief back and forth with a member of the TIP inner circle who's a shareholder.

1:15:56And he said that he was part of the XPO deal and he made about 10x on that. And as a result, he said he's also part of the QXO deal. But he actually got in a little while back and And he got in around$10 to$11. And he felt like even now, he likes that price a lot more. So interestingly, the$11 mark is right around the present value of QXO if we wanted to meet our 12 % return threshold. But again, even if this business got down there, I just don't have enough conviction in this name to make it a position in the intrinsic value portfolio. I'm glad we covered QXO because it competes in an industry that I think we probably need to do more homework on as we are surveying all the different available investment opportunities for our intrinsic value portfolio.

1:16:41And it's at least something I need to do to get more familiar with this industry. And it's always exciting to learn about a new CEO with an incredible compounding track record. And I'll mention, we just went through a lot of numbers and it's probably a lot to process. And so if you want to see the models and the numbers mapped out in a way and really learn the valuation process, you can sign up for our free newsletter. Every newsletter we do corresponds to the businesses that we cover on the podcast here and shows the valuation process and then links to a free model that you can view. So you'll find the link in the show notes or you can just go to theinvestorspodcast.com to sign up for our free newsletter.

1:17:23But yeah, I see a moatless business long-term here with QXO that's increasingly levering up on debt and targeting arbitrary goals around long-term revenue, in my opinion, that are not focused on shareholder value creation intrinsically. And the management comp structure reflects that to some extent too. So I am also not falling over myself to buy QXL. There's just way too much uncertainty. And we could come back in two years and decide that some of the acquisitions have aged well, the margin profile has truly improved, and the debt has remained manageable. And if that's the case, especially if we get some moderation or decline in the stock price, that would be a really different conversation.

1:18:05But today though, I'm happy to sit on the sidelines to see how this one plays out as we keep sifting through other opportunities in the markets. And we've been talking for a while now though. And so I think it's time to close today's episode off. And I'd like to leave you all with a quote. This one is from Brad Jacobs, the subject of much of our conversation today and displays his process on M &A deals and how he times them. So he says, what I do is try to buy one or two big deals a year and some smaller deals to tuck in. And some of them were buying at the bottom, some were buying in the middle, some were buying towards the top.

1:18:43And sometimes, you know, it's the top and you're like, okay, well, better wait until this blows over because the valuations get nutty or the assumptions that people have are just unrealistic. But I don't try to just buy at the bottom of the cycle. That's not it. It's not our business strategy because sometimes you'll just miss. So that's Brad Jacobs' M &A philosophy. And to me, this indicates that Brad doesn't bother thinking too much about the macro and whether he should or should not be making deals based on factors outside of his control. And that probably helps to explain his successful track record.

1:19:19And that mentality is very much what you want to see in a good capital allocator typically. So it will be interesting to see how the QXO story plays out. And I really appreciate you pitching it, Kyle. And with that, we'll see you all again next time. Just a quick note before you go, this episode would not be possible if it weren't for our friends at Fiscal AI. It's our complete stock research terminal that Daniel and I use on every single episode and with every company we dig into, pulling 20 years worth of financials, digging into segment data, grabbing quotes from the latest earnings calls, and making use of real-time institutional grade data all in one place.

1:19:59And if you want to try it yourself, well, head to fiscal.ai slash T-I-V-P. That'll include two weeks of Fiscal Pro for free and 15 % off if you upgrade to a paid plan. That's fiscal.ai slash T-I-V-P. Thanks for listening. Thanks for listening to TIP. Follow the Intrinsic Value Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs.

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