Think of an area to look for a growth share with brilliant potential and what comes to mind? AI? Tech? Emerging markets?
A building products distributor might not be top of mind!
SIG has tumbled 70% in five years and Travis Perkins is down 49% in the same timeframe. Hardly the stuff of investor dreams.
Across the pond, though, building materials distributor QXO (NYSE: QXO) has soared 107% over the past 12 months. It now commands a market capitalisation of $18bn.
Squeezing out efficiencies
Is this really a growth share?
After all, the market for building materials is mature. Not only that, but with ongoing economic uncertainty in the US, it could be that the market for roofing felt, joists, pipes, and the like actually contracts rather than expands in coming years.
I do see QXO as a growth share, but not because I expect its target market to see a surge in demand.
Rather, what attracts me here is the business model.
QXO reckons that a plethora of small and medium-sized distributors makes the market ripe for consolidation, with the opportunities for cost efficiencies that brings.
Proven performers running the show
This sort of approach to “rolling up” a fragmented market is nothing new. UK shares like Bunzl and NWF have a similar playbook for catering supplies and heating oil, for example.
So, why has QXO stock soared?
A key reason is that its management has a stellar track record of creating massive shareholder value with exactly this sort of approach, including at companies like United Rentals and GXO Logistics.
Plus there is a tech angle to whet some investors’ appetite for that in the current market. QXO reckons that beyond straightforward economies of scale like bulk buying discounts, it can wring further efficiencies from companies it acquires by implementing top-notch tech solutions.
That could help it manage stock efficiently, optimising product availability without tying up more working capital than is necessary.
Ongoing growth potential
For now, this is still an idea more than a proven business, at least on the scale QXO is ultimately targeting.
That could change fast, though. Just this month, for example, the company announced a $2.3bn deal to buy a building supplies distributor that it expects to be “highly accretive to 2026 earnings”.
QXO management’s decades of experience gives me confidence they can spot attractively priced acquisition opportunities. As this month’s deal shows, they are not hanging around in doing so.
Still, a risk of rapid growth through acquisition is overpaying in a rush to scale.
For QXO I also see a key man risk. That $18bn market cap is hard to justify based on the business model or balance sheet alone. It reflects market confidence in the proven management team.
If for any reason management changes, that could hurt the QXO stock price badly.
Still, even after more than doubling in a year, I reckon this growth share could potentially have a lot further to run. It is still early days in the company’s development, but I see it as a share for investors to consider.
