Brazilian industrial heavyweight WEG (WEGE3) missed market expectations for the second consecutive quarter, sparking a sharp selloff in its shares.
The company reported a net income of R$1.54 billion in Q1 2025, up 16.4% year-on-year, but below the R$1.78 billion consensus forecast, according to LSEG data.
Similarly, EBITDA rose 22.8% to R$2.17 billion but still missed estimates of R$2.37 billion.
EBITDA margin slipped from 22.1% to 21.6%, highlighting profitability pressures.
WEG manufactures a wide range of electrical equipment, including motors, generators, transformers, and turbines.
Despite the topline growth, its underwhelming profitability led to a 9.15% drop in share price, which slid to R$45.85 by mid-morning on April 30, according to InfoMoney.
Margin pressure and acquisitions weigh on returns
One of the most notable concerns was the fall in return on invested capital (ROIC), down 5.7 percentage points to 33.2%.
The company attributed this to its $400 million acquisition of Regal Rexnord assets, including Marathon, Rotor, and Cemp, as well as investments in fixed and intangible assets.
Analysts at Genial Investimentos noted that “margin compression and a shift in product mix toward lower-margin, less verticalized segments” negatively impacted results. The strengthening of the Brazilian real also dented foreign revenues and overall profitability.
JPMorgan and Goldman Sachs flag risk
JPMorgan warned ahead of earnings that WEG’s Q1 results could trigger a negative market reaction, estimating a 5%–10% decline relative to the Ibovespa.
The bank cited several red flags: net revenue missed estimates by 3%, gross margin declined to 32.9%—its lowest since Q3 2023—and SG&A expenses surged 37% year-over-year, outpacing revenue growth.
Nonetheless, JPMorgan pointed out some positives. Domestic revenue grew 14% year-over-year, outperforming estimates, while the effective tax rate came in at 17.5%, lower than the expected 19.8%.
Goldman Sachs echoed caution, stating that “the market is focused on whether margins have peaked.”
It maintained a sell recommendation, highlighting that WEG trades at 19.9x 2025 EV/EBITDA, compared to the 16.9x average for global industrial peers—a premium that’s becoming harder to justify amid slowing growth.
Outlook: investors eye margins and solar exposure
During the earnings call, Goldman analysts flagged three key watchpoints: input cost trends, revenue from lower-margin solar generation, and the overall growth outlook amid a challenging macro environment.
While acknowledging WEG’s defensive profile in Brazil, Goldman warned that “momentum may peak in early 2025”, with signs of margin stabilization and weakening sales growth. Investors appear increasingly cautious about the premium valuation attached to the stock.
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