Decisive Acquisitions And Emerging Markets Propel Growth And Innovation In Power Solutions

Key Takeaways

• Strategic acquisitions and verticalization enhance production capabilities and operational efficiency, boosting revenue growth and market share.
  
• Focus on emerging markets like energy storage and electric vehicle powertrains positions WEG for significant future revenue and earnings growth.
  
• WEG faces potential revenue and profitability challenges due to decreased wind energy orders and rising operational costs amidst economic and regulatory pressures.

Catalysts

Engages in the production and sale of capital goods in Brazil and internationally.

• The acquisition of Volt Electric Motors and verticalization investments in Mexico and Brazil are anticipated to drive revenue growth by expanding production capabilities. These strategic acquisitions and investments are expected to enhance operational efficiency and increase market share, ultimately boosting future revenues.
  
• The continued demand and delivery of long-cycle equipment such as large transformers and substations, particularly in North America, indicate a sustainable revenue stream and potential improvements in net margins due to the higher profitability of these products.
  
• The expansion of transformer production capacity, especially in Brazil, addresses the growing demand in the T&D sector, which is expected to maintain or improve future operating margins by leveraging economies of scale and optimizing production processes.
  
• Integration of recently acquired businesses like Marathon, Rotor, and Cemp provides opportunities for operational efficiencies and synergies, potentially improving net margins and earnings through cost reductions and enhanced market presence.
  
• The strategic focus on high-potential markets such as energy storage solutions and electric vehicle powertrains, particularly for commercial and heavy vehicles, positions WEG for significant revenue growth in emerging industries, thereby positively impacting future earnings.

WEG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WEG's revenue will grow by 16.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.1% today to 16.8% in 3 years time.
• Analysts expect earnings to reach R$9.4 billion (and earnings per share of R$2.11) by about November 2027, up from R$6.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.8x on those 2027 earnings, up from 38.6x today. This future PE is greater than the current PE for the BR Electrical industry at 22.0x.
• Analysts expect the number of shares outstanding to grow by 1.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.89%, as per the Simply Wall St company report.

WEG Future Earnings Per Share Growth

Risks

• The future performance of WEG may be impacted by general economic and industry conditions, which could affect its revenue growth and profitability.
  
• WEG's revenue from wind energy has decreased due to a reduction in orders, which may negatively impact their future earnings if this trend continues.
  
• Freight costs have been rising, potentially increasing operational expenses and affecting net margins.
  
• Regulatory approvals and fulfillment of conditions for the acquisition of Volt Electric Motors may present challenges, affecting the expected synergies and future earnings.
  
• The international expansion, including regulatory changes such as tariffs, may pose risks to WEG's ability to market its products, potentially impacting revenue and profit margins.

Valuation

• The analysts have a consensus price target of R$57.61 for WEG based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$72.0, and the most bearish reporting a price target of just R$42.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$55.7 billion, earnings will come to R$9.4 billion, and it would be trading on a PE ratio of 45.8x, assuming you use a discount rate of 18.9%.
  
• Given the current share price of R$56.09, the analyst's price target of R$57.61 is 2.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.