QXO Inc

QXO shares underperformed during the period due to near-term macroeconomic headwinds, including a sluggish U.S. housing market and elevated interest rates impacting residential construction. However, the transformative acquisition of TopBuild significantly strengthens QXO's long-term competitive position. This acquisition expands QXO's scale, broadens its product offerings, and enhances its installation platform. Management's ability to leverage AI and data analytics is expected to optimize operations, improve supplier economics, and drive margin expansion, ultimately leading to stronger free cash flow generation and higher returns on invested capital.

QXO shares underperformed during the period due to near-term macroeconomic headwinds, including a sluggish U.S. housing market and elevated interest rates impacting residential construction. However, the transformative acquisition of TopBuild significantly strengthens QXO's long-term competitive position. This acquisition expands QXO's scale, broadens its product offerings, and enhances its installation platform. We believe management can leverage AI and data analytics to optimize operations, improve supplier economics, and drive margin expansion, ultimately leading to stronger free cash flow and higher returns on invested capital.

The Fund initiated a position in QXO, Inc. during the quarter, reflecting a positive outlook on its potential within the Industrials sector. The manager emphasized the importance of high-quality companies with durable competitive advantages, which aligns with QXO's profile. The overall market environment, driven by AI-related capital investments, supports the growth prospects for companies like QXO, Inc. as economic conditions remain resilient. This strategic addition is part of a broader focus on companies that can deliver strong returns on capital and possess pricing power.

QXO, Inc. is a distributor of roofing, waterproofing and complementary building products. Following our entry point in April, QXO announced it would acquire TopBuild, the largest distributor and installer of insulation and related building products in North America, for $17 billion. We believe this deal, financed through QXO stock and debt, led to investor concerns around the Company’s capital structure and integration risk. However, our thesis for QXO remains largely unchanged, and we encourage investors to read our summary in the Portfolio Changes section of this letter.

QXO is doing exactly that. As it consolidates the prosaic, low-tech business of building-products distribution, it is rebuilding the operating model itself, from pricing and procurement to inventory and branch data, rather than bolting technology onto the old way of working. We think about AI through the same lens. Most early corporate AI adoption is a motor swap: existing workflows, existing structures, existing assumptions, with AI bolted on. The companies that compound the most value are those willing to redesign the floor.

During the quarter, QXO, Inc. was among the top detractors from performance. The company reported better-than-expected first-quarter results and raised its full-year guidance. However, the weakness instead centered on QXO's announcement of a sizeable acquisition that pressured the stock as investors weighed the equity component used to fund the deal and the integration involved in absorbing a large new platform.

QXO Incorporated (QXO) is a building products distribution platform pursuing a consolidation strategy within a highly fragmented, ~$200 billion addressable market. The company aims to aggregate local distributors into a national platform through acquisitions and operational standardization. The investment case is supported by a capital allocation strategy focused on acquiring subscale businesses and improving performance through procurement, logistics, and technology initiatives. As QXO invests in digital and data-driven operations, it has the potential to enhance pricing consistency, inventory management, and service levels, positioning it favorably against smaller peers. We believe the combination of scale, operational improvement, and end-market demand may support revenue growth, margin expansion, and attractive returns on invested capital.

QXO Incorporated (QXO) is a building products distribution platform pursuing a consolidation strategy within a highly fragmented, ~$200 billion addressable market. The industry remains predominantly local and operationally fragmented, with many subscale distributors lacking purchasing power, logistics scale, and technological capabilities. QXO’s strategy is to aggregate these assets into a national platform through acquisitions and operational standardization. We believe the size of the market and the company’s acquisition pipeline provide a meaningful opportunity to build a scaled operator over time. As QXO invests in systems, data analytics, and pricing tools, we believe there is potential to improve pricing consistency, inventory management, and service levels.

In 2024, we initiated a position in QXO at approximately $11 per share. Under Brad Jacobs’ leadership, the company is in the early stages of executing a bold plan to consolidate and disrupt the $800 billion building products distribution industry. Our strategy focuses on partnering with exceptional capital allocators. Having followed Brad’s remarkable career for nearly three decades, I rank him among the very best. His personal commitment of $900 million to QXO further aligns his interests with ours. We expect the team to expand Beacon’s EBITDA margins by about 500 basis points and to double cash flow within four years. Ultimately, we envision QXO achieving over $50 billion in revenue with returns on capital of 17-23%.

We added a new position in QXO, a newly formed building materials distribution platform in the industrials sector led by Brad Jacobs. We have a long history with Jacobs, an executive with a strong track record of building and scaling businesses such as XPO and United Rentals. The company is pursuing a strategy of consolidating the fragmented building materials industry by acquiring mid-size distributors and applying advanced technology, logistics and pricing systems to improve efficiency and profitability. We see the potential for the company to evolve into a scaled leader with meaningful margin expansion opportunities.