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Western Union (NYSE:WU) is the leading money transfer and bill payment service provider in the world. The company has about 15% market share in the industry. The money transfer service industry is expected to see gains in the coming quarters as the macroeconomic conditions in the developed countries are expected to improve. I believe, with its worldwide expansion and its large reach, Western Union is going to benefit the most from this increase in the remittance business. Below I will put some arguments to support my bullish view.

Growth Factors:

Digital Growth Opportunity will help increase its customer numbers:

With the advent of Internet and mobile technology, online money transfer has increased rapidly. To gain good market share in online and mobile transactions, Western Union launched its online money transfer portal westernunion.com. Revenue from online money transfer has grown by 27% in 2012. The company is expecting a business of $500 million from westernunion.com by 2015. According to the company, 80% of the customers were new to the franchise. This amounts to 20% cannibalizing of customers. I believe that the online money transfer will have a further cannibalizing effect on existing customers. As online transactions have low fees compared with the traditional money transfer mode this will have a negative impact on revenue. The cost associated with online transfer is also low. So the operating margin will have little or no impact.

Improved Macroeconomic conditions in the developing countries will help boost revenue in coming years

The positive employment data and the surge in the housing industry in the U.S. will help Western Union increase its revenue. The Construction industry in the U.S. has the highest number of immigrant labors, so an increase in construction will have a positive impact on the company's revenue. As more immigrants will have money to transfer to their families the revenue will increase. According to the OCED, the other developed economies have also shown signs of revival. So the money transfer service will grow in the coming year. With services in more than 200 countries and a strong agent network, Western Union is poised to gain from this surge.

Expansion in India will help the company to open new revenue opportunities

According to World Bank Data, India receives the highest remittance in the world. So, Western Union has announced expansion in this important market. The company has announced online bank-to-bank transfer in India. The company has also entered into a collaboration with the Indus-ind bank to provide foreign exchange payments to small businesses in India. These strategies will open new revenue opportunity for the company.

Peer Analysis:

MoneyGram (NASDAQ:MGI): MoneyGram is the competitor to Western Union in the money transfer services industry. It has 5% market share and is second to Western Union. The company has shown strong growth in the Middle East region but has muted revenue in the European region. The expected buoyancy in macroeconomic conditions in the developed countries will help the money transfer industry. This will help MoneyGram to increase business in the coming years. The company has also invested heavily in digital and mobile applications to increase its online money transfers and bill payments. The company has a strategy to increase the number of its agents and its presence in India. The company has also entered into agreement with the Bank of Baroda and India Post to expand its services in India. This will help the company gain business in India and I believe these strategies will help the company increase its revenue and income in the coming years.

Xoom Corp (NASDAQ:XOOM): Xoom is the leading money transfer services provider online. With the increasing penetration of Internet and mobile, the online payment market has seen a rapid surge. Xoom provides online money transfer in major remittance countries like India, and Indonesia, etc. The company has been expanding cap-ex and R&D to increase its product offerings. Recently, the company announced Xoom Money transfer application for Android OS. I believe that growth in penetration of the Internet and mobile will help the company increase its revenue and profit. Also, the global expansion and increase in customer base will help the company gain economies of scale and the operating cost per customer will decrease. We expect the company to generate positive income in FY14.

Ratio Analysis:

P/S ratio

Forward P/E

`PEG Ratio

MGI

0.97

15.61

1.35

WU

1.71

10.99

1.32

XOOM

10

N/A

N/A

The Western Union share is selling at a premium compared with that of MoneyGram. The high value of the P/S ratio for Xoom indicates that investors believe in the long-term growth of Xoom. The PEG ratio for Western Union and MGI are comparable.

Conclusion

Western Union has been facing issues in the U.S.-Mexico Corridor and to gain market from its competitors it has reduced the fee in certain corridors. The company has also started its digital and mobile money transfer and bill payment services. According to the company, there has been only a little cannibalization effect from this. So this is going to help the company add new customers and get more revenue. The company has also been investing in its strategic location to increase its footprints. In an important market like India, the company has started bank-to-bank money transfer in collaboration with the Kotak Mahindra Bank. This will help the company add more customers and increase its revenue.

Source: Western Union: Here's What Will Drive Growth For This Money Transfer Company