Allan Gray - Orbis Global Equity Feeder Fund

Our investment approach is designed to capitalise on gaps between stock prices and the intrinsic value of the businesses they represent. The bigger the gap, the more attractive the opportunity. Normally, the stock market sets the price while we focus on analysing the fundamentals of the business.

This makes our investment in QXO unusual. There was no public market price, as we invested through a private placement, and there was no business yet to analyse – just a US$5bn cash pile waiting to be deployed. Yet, QXO has become the largest position in the Orbis Global Equity Fund, making up nearly 7% of the Fund.

Why? Because in a deeper sense, QXO is a great example of what we do. In fact, it is remarkably similar to another investment we made almost 12 years ago – one which became the second-biggest contributor to the Fund’s performance over the past decade. At the time, the analyst recommending the stock wrote that it was “… a bit venture capital-like in that we are betting on an entrepreneur, a business plan, and a pile of cash”.

That investment was XPO Logistics, with a market value of just US$468m when the line above was written in 2012. Since then, XPO has evolved into three separate companies that are collectively worth more than US$20bn. Its shares returned 17 times over the last 14 years, tripling the S&P 500’s tech-fuelled boom.

The entrepreneur behind both XPO and QXO is Brad Jacobs. Although we were just getting to know Brad in 2012, XPO was his third rodeo. Prior to XPO, he founded and ran United Rentals, and prior to that United Waste Systems. All three stocks handily beat the S&P 500 during (and after) Brad’s tenure as CEO.

Over the years, Brad has consistently created shareholder value with a repeatable “playbook” for capital allocation and operational excellence. He also has a knack for building enduring teams that can continue to add value long after he has stepped down from day-to-day involvement. And perhaps most importantly, he always puts his own money on the line – US$900m in the case of QXO – which creates an unusually strong alignment of interests with fellow shareholders.

That said, it would be too simplistic to say that our investment in QXO is merely a bet on Brad. There are many great companies run by great CEOs that we don’t own because the price isn’t right. We invested in QXO via a private placement in July 2024 at a smaller premium than we paid for access to XPO’s cash pile back in 2012, so this time we are getting a better deal.

It would also be too simplistic to say we are giving Brad a blank cheque. We would not have invested if we didn’t share his enthusiasm for the specific opportunity that QXO is targeting – the building products distribution industry. It may not sound exciting – neither did XPO’s trucking business – but that is often precisely what creates the opportunity. The industry is highly fragmented, with thousands of sub-scale distributors lacking a national footprint and leveraging antiquated technology (if any). In many ways, it is reminiscent of the early days of XPO.

Building products distribution is also large (roughly US$800bn across the US and Europe) and fast-growing (7% per annum over the last five years). Fragmented competition should yield ample M&A opportunities, where QXO can create substantial value by improving the operations of acquired businesses. Disruption risk is also low, and it fits the playbook perfectly.

The obvious challenge with analysing QXO is that it is mostly just a pile of cash and we don’t know exactly what the company intends to buy.

Based on our assessment of the opportunity, we think QXO could be worth 2-5 times book value, well above the 1.4 times we paid. We get there by exploring a range of scenarios, where two critical variables are how much capital the company can deploy and what rate of return it earns on that capital.

If we assume that 80-90% of profits are reinvested and the business can earn 15-20% returns over the longer term, QXO should be able to command a premium multiple.

To be clear, our investment in XPO didn’t deliver value in a straight line, and we don’t expect that QXO will be any different. As with the logistics business, there is a substantial cyclical element to building products and a severe recession would be negative for the business. Over the long term, however, it could present an opportunity if the downturn allows us to scoop up acquisitions at favourable prices.

The range of outcomes is wide, but we believe that risk is mitigated by the attractive price we paid, our extensive understanding of Brad’s playbook, the attractive attributes of the industry, and Brad’s intention to run the company with modest leverage.

While our focus here has been on the newest “XO” in the Fund, we would emphasise that we remain just as enthusiastic about the others, which together account for almost another 8% of the Fund. Brad continues to have substantial interests in XPO, RXO and GXO Logistics – collectively worth about US$500m. Despite their strong performance over the years, we believe that each of these three companies continues to offer a compelling and asymmetric investment opportunity over our investment horizon.

Our founder, Allan Gray, often used a colourful expression to underscore the importance of acting with conviction when you believe you have an edge – “Go for the jugular”. The XO companies look unusually attractive to us, we know them unusually well and we believe they deserve an unusually large position.

Over the quarter, we initiated our position in QXO and exited our position in Sumitomo Mitsui Financial Group, a Japanese bank, into relative share price strength.

Adapted from a commentary contributed by John Christy, Orbis Investments (Canada) Ltd., Vancouver and Eric Marais, Orbis Investment Advisory Pty Limited, Sydney