strong margins in the 1st quarter and possible positive revisions, but why did WEGE3 fall?

Inflection point that could lead to better results or lower-than-expected numbers? The result of electric motor manufacturer WEG (WEGE3), considered one of the safe havens in the first quarter of 2024 (1Q24) transport and capital goods season, was released this Thursday (2) and brought different readings from analysts market on the share. One party pointed out that the balance sheet could lead to positive revisions, while another approved the numbers, but continues to see the action as “expensive”, while highlighting the slowdown in revenues. The shares reacted negatively in the session and closed with a drop of 1.77%, at R$38.85.

The company had a net profit of R$1.33 billion in the first quarter, an increase of 1.6% compared to the positive result obtained a year earlier. The operating result measured by Ebitda was R$1.77 billion from January to the end of March, annual growth of 4.8%. Analysts, on average, expected net profit of R$1.33 billion, in line with expectations, and EBITDA of R$1.82 billion in the first quarter (i.e., slightly below projections), according to data from LSEG .

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JPMorgan saw the numbers as positive, even though Ebitda was slightly below consensus, with a strong margin of 22.0% offsetting the disappointment (at 3%) with revenue growth of 4% year-on-year, versus expected by the bank at 7%.

Among the main positive points, margins remained strong, with a gross margin of 33.2% (+0.2 percentage points, or pp, on an annual basis) and EBITDA margin of 22.0% (+0.1 pp on an annual basis). Yearly); ii) GTD (Generation, Transmission and Distribution) abroad with an annual increase of 41%, once again the business line showing the highest growth; and iii) the effective tax rate drops by 18%, in line with the level observed a year ago, allowing net profit to be 1% above JPMorgan’s projection.

The bank highlighted net revenue as one of the main negative points, which was 3% and 5% below JP’s projection and consensus, respectively, growing 4% year-on-year. Revenue was impacted by the 5% rise in the real in the period to R$4.95 per dollar.

The bank, in turn, saw as positive the conclusion of the deal to buy Regal Rexnord’s industrial electric motors and generators business announced on Tuesday, which was expected to offset the slowdown in revenues, allowing investors to focus on strong margins. JPMorgan has a recommendation equivalent to buy (overweightexposure above the market average)

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Itaú BBA also has a recommendation equivalent to buying for WEG, with a target price of R$47. For the bank, WEG brought strong numbers for 1Q24, especially due to the solid outperformance in profitability. The data demonstrated to the bank that it is possible for profitability to remain at higher levels than expected, especially considering that the EBITDA margin was 22%. Net profit exceeded the bank’s estimates, and the positive surprise for the balance sheet came from better-than-expected financial results. The BBA also anticipated a positive reaction to the numbers (which did not materialize) and considered it possible for the market to make positive revisions to WEG’s numbers.

Among the negative points for BBA, the company’s revenue in the domestic market, in the energy and GTD segments were below expectations. The oil & gas and mining segments showed good demand for long cycle equipment in the quarter. In the foreign market, however, low demand in China and Europe were highlights. Revenues abroad were lower than expected, with the engine segment falling around 9% in the annual and quarterly comparison.

Less excited, Bradesco BBI and BTG Pactual highlighted that they continue with a neutral recommendation for the stock, even though BBI raised the target price for WEGE3 from R$38 to R$40 following the results.

BBI analysts also highlighted the strength of the Ebitda margin, as did BTG, but both still see the share’s valuation as being quite stretched. “Although we continue to see WEG as an excellent company (one of the best corporate stories in Brazil) with solid growth trends ahead, we remain neutral for valuation reasons (32 times price to earnings, or P/E),” points out BTG.