QXO (NYSE: QXO) is restocking its war chest, but that comes with a near-term hit to existing holders.
Shares of QXO traded down 10% as of 11 a.m. ET after the building products distribution company launched a new stock and convertible offering.
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Secondaries add to share count
QXO is a new company formed by serial entrepreneur Brad Jacobs that aims to consolidate the building products distribution business. The company closed its first deal last month, an $11 billion purchase of Beacon Roofing Supply, and remains on the hunt for further targets.
Late Monday, QXO took a step to replenish its cash coffers. The company said it was looking to raise $1 billion via a sale of common shares and a separate issue of convertible stock. QXO said it would use the net proceeds to repay indebtedness under its senior secured term loan facility, “which will strengthen the company’s position with respect to future acquisition opportunities.”
Existing shares tend to come under pressure when a secondary offering is announced because it adds additional supply to the market, which can alter supply and demand dynamics. In QXO’s case, the sale comes at a time when the stock was on an upswing, meaning that despite Wednesday’s decline, the stock is still up more than 3% since late last week.
Is QXO stock a buy?
Investors need to focus on the long-term here. Yes, in the near term, the stock sale will cause dilution. But those buying in should focus on what Jacobs is trying to build and understand that project will require capital.
Jacobs is the architect of two of the top-performing Fortune 500 companies of the last decade, United Rentals and XPO. He’s following the same playbook here, which involves both using tech to expand margins and grow organically, as well as consolidating fragmented markets. Jacobs has targeted $50 billion in annual sales for QXO in the years to come, compared to about $10 billion right now.
As QXO grows, it should be able to use free cash flow to fund its dealmaking activities. But for now, the offerings represent the quickest, most efficient way to build capital.
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Lou Whiteman has positions in QXO and XPO. The Motley Fool recommends XPO. The Motley Fool has a disclosure policy.
