On Monday, Wolfe Research adjusted its rating on WEX Inc. (NYSE:WEX), moving from Outperform to Peer Perform. The shift in assessment comes in the wake of the company's recent earnings response, which saw a significant drop in stock value. The downgrade was primarily driven by concerns over the company's ability to accelerate revenue, particularly in relation to its medium-term targets.
The analyst from Wolfe Research highlighted that each of WEX's business segments is confronting challenges that are likely to persist into much of 2025. The Mobility segment, for instance, reported an adjusted growth of 8% in the third quarter, which normalizes to approximately 5% when accounting for days-mix—a deceleration from the previous quarter's 7.4%.
Fuel prices are anticipated to continue to pose significant challenges in the first half of 2025. Transaction volumes have been fluctuating narrowly between a 1% decrease and a 1% increase, with recent activities affected by a slowdown in local fleets.
The Corporate Payments division is also facing obstacles, with the transition of BKNG expected to significantly weigh on the segment through most of 2025. Additionally, travel and B2B volumes have slowed to a high single-digit range.
In the Benefits segment, the analyst noted that declining interest rates are likely to marginally affect the growth of float income—a minor impact on earnings per share due to lower expenses. However, even with high single-digit account growth and a 1-2 percentage point lift from volume growth, the high single-digit float income is projected to fall substantially short of the 15-20% targets.
The Wolfe Research analyst's comments reflect a cautious outlook on WEX's financial performance and sector-specific headwinds that could impact the company's growth trajectory. With these factors in mind, the firm has adjusted its stance on WEX's stock, setting a more conservative expectation for the company's near-term performance.
In other recent news, WEX Inc. reported a slight increase in its third-quarter revenue for 2024, reaching $665 million, a 2% rise year-over-year. The firm also announced an adjusted net income per diluted share of $4.35, marking a 7% increase. Despite facing market challenges such as declining fuel prices and operational issues, the company revised its full-year outlook and continues to invest in growth initiatives.
The company's Mobility segment saw an 8% growth in revenue, and the company achieved $110 million in annual cost savings, half of which was reinvested in growth initiatives. WEX Inc. also increased its share repurchase program by $1 billion, reducing the share count by 12% since Q1 2022.
However, the company revised its 2024 guidance, anticipating Q4 revenue to be between $630 million and $640 million. Full-year revenue is projected to range from $2.62 billion to $2.63 billion, a $73 million decrease from prior guidance. These adjustments are due to declining fuel prices and operational challenges.
Analysts noted bearish factors such as increased provisions for credit losses expected in Q4 and delays in client onboarding in the Benefits segment, pushing revenue recognition to the next quarter. On the bullish side, the company's Mobility segment saw an 8% growth, and the Corporate Payments segment continues to expand with new customer relationships.
These are the recent developments for WEX Inc., which remains committed to its growth strategy and continues to invest in innovation, such as AI-powered Benefit Assistance offerings, demonstrating its resilience and adaptability in a fluctuating market.
InvestingPro Insights
In light of Wolfe Research's downgrade of WEX Inc. (NYSE:WEX), InvestingPro data offers additional context to the company's current financial position. Despite the challenges outlined in the analyst's report, WEX maintains a solid revenue base of $2.66 billion over the last twelve months as of Q3 2024, with a modest revenue growth of 6.06% during this period. The company's profitability remains strong, boasting a gross profit margin of 72.4% and an operating income margin of 26.53%.
InvestingPro Tips highlight that WEX's management has been aggressively buying back shares, which could be seen as a vote of confidence in the company's long-term prospects. Additionally, the stock is currently trading at a low P/E ratio relative to its near-term earnings growth, with a PEG ratio of 0.79, potentially indicating undervaluation despite the recent stock price decline.
However, aligning with the analyst's concerns, InvestingPro Tips also note that 13 analysts have revised their earnings downwards for the upcoming period, and the stock has taken a significant hit over the last week, with a 1-week price total return of -16.01%. This recent volatility underscores the market's reaction to the challenges facing WEX across its business segments.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for WEX, providing a deeper dive into the company's financial health and market position.
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