By all accounts, 2024 is turning out to be an electrifying year for building materials distribution: In June, The Home Depot closed on its $18.25 billion purchase of SRS Distribution. The potential acquisition of Beacon Roofing Supply by QXO could significantly reshape the once-staid roofing materials distribution industry. 

With Beacon being one of the top distributors in North America and QXO aiming to innovate in building products logistics, an analyst at Barclays — who agreed to speak on background because they may have an interest in the outcome — noted the QXO deal could offer great benefits for contractors, shareholders, and the larger market. 

In short, the recently completed — and possibly upcoming — purchases are generating excitement on Wall Street, Main Street, and rooftops of various pitches.

Before the corks are popped off bottles of Cristal and Krug, it’s worth noting that these heady days are nascent, and everything is speculative until there is ink on a purchase agreement. QXO already made its first play for French electrical distributor Rexel, which went nowhere. And, since Beacon has said nothing other than “no comment” since The Wall Street Journal first leaked the offer on Nov. 18, speculation has run rampant. 

One QXO representative, speaking on background, acknowledged the WSJ leak was “not helpful,” and nobody is measuring curtains for a new headquarters anytime soon. However, according to some of the industry’s best market segment analysts, the deal has some real upsides.

Why is Beacon So Attractive?

Recently, Beacon reported impressive third-quarter 2024 sales of $2.77 billion, marking a 7.3% increase compared to last year. This strong performance showcases its resilience in a stable market, boosted by ongoing demand for re-roofing. 

Despite these successes, Beacon has often been undervalued by Wall Street. Keith Hughes, managing director at Truist Securities, who CNBC listed as one of the top 10 consumer goods sector analysts, drafted a detailed Equity Research Report of QXO’s interest in purchasing Beacon. 

“Beacon has traded at [a] discount to [its] peers for years despite good performance and competitor multiples,” Hughes writes. “[Beacon’s] trading multiple has been well below other distributors for many years; more recently, the stock has traded around 2-3 turns below the group, with the gap widening in 2024 given 2023 storm comparables … this comes despite better margin performance and, in our view, more consistent financial performance since current CEO Julian Francis took over at the company.”

Truist Securities points out that Beacon trades at an EV/EBITDA multiple of 9x, considerably lower than peers like SRS Distribution, acquired by Home Depot for 16x EBITDA. This undervaluation underscores Beacon's unrecognized financial potential. To clarify, the EV (Enterprise Value) to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) ratio helps gauge a company's overall value in relation to its earnings. 

With a price-to-sales ratio of 0.71 and a forward price-to-earnings ratio of 14.25, Beacon shows strong earnings potential relative to its stock price. Analysts estimate its fair value to be around $115.22 per share, higher than its recent trading price of $98.75. 

Who is Brad Jacobs?

Jacobs, the founder of QXO, based in Greenwich, Conn., has a wealth of experience in strategic acquisitions and has successfully built several industry-leading companies. Jacobs is focused on achieving operational excellence with a track record of over 500 M&A transactions and raising more than $30 billion in capital. In a recently published interview, Jacobs mentioned, “There’s a clear path of how I can [reach] $50 billion” in the roofing industry. 

QXO, launched in 2024, has already secured nearly $5 billion in capital, positioning itself for strategic initiatives like this acquisition. Beacon’s undervaluation becomes evident when looking at its financial metrics. 

This highlights significant upside potential, especially if QXO can enhance operational efficiencies. A valuation analysis suggests that using a price-to-earnings ratio, or P/E, of 15-16 with an expected earnings-per-share (EPS) of $7.23 could price shares between $108.45 and $115.68, reinforcing that Beacon is an attractive acquisition target. 

The roofing materials market is particularly appealing for QXO, offering consistent demand for re-roofing driven by essential needs. Truist Securities describes the industry as having “notable pricing strength” and is largely consolidated, with few major players aside from Beacon, ABC Supply, and SRS Distribution. 

This consolidation creates stable pricing structures and growth opportunities, which bodes well for Beacon's position in the market. 

For roofing contractors, the acquisition by QXO could lead to transformative benefits. QXO aims to leverage technology to enhance operational efficiency, leading to better inventory management and quicker deliveries for contractors. 

Jacobs’ strategy, which he has discussed previously and is detailed in his 2024 memoir, “How to Make a Few Billion Dollars,” involves modernizing the building products supply chain through AI and advanced analytics, potentially giving Beacon’s contractor clients a competitive edge. Underscoring his commitment to AI, one of Jacobs’ first C-suite hires was Ashwin Rao as Chief AI Officer. Rao most recently came from the large retailer Target, where he was instrumental in building AI into the company’s core retail operations, which has since reaped billions for the Minnesota-based retailer. 

Additionally, QXO’s financial strength and lack of debt could improve Beacon’s financial stability, allowing for more flexible pricing and better contractor support programs. Truist analysts note that under CEO Julian Francis, Beacon has shown more consistent financial performance, which QXO’s leadership could accelerate. 

Nothing is Final Until It Is

However, there are challenges to consider. Beacon's debt-to-equity ratio is 1.95, which could complicate negotiations. Despite this, QXO’s strong liquidity, around $5 billion, and Jacobs’ experience with complex acquisitions could help overcome these obstacles. 

Another concern is the possibility of competing bids from other firms, including private equity groups and large retailers. 

Still, analysts from Truist suggest that antitrust issues might limit the number of distributors, like ABC Supply and SRS, that can participate. Overall, the financial and operational synergies between QXO and Beacon make this potential acquisition a promising opportunity for growth in the roofing materials market.