Western Union Calling by Michael Santoli
Highlighted companies: The Western Union Co. (WU), First Data Corp. (FDC), Moneygram International Inc. (MGI)
Summary: On Sept. 29, The Western Union Co. (WU) spun off from First Data Corp. (FDC). The company's business focuses on money transfers; its long-term profitability depends on cross-border emigration and immigrants wiring money home. The article looks at WU's strengths and weaknesses: Strengths: (1) Cross-border remittances grew 8%/year from 2003-2005, and WU increased its market share from 10-15%, allowing its revenue to grow 12% annually during the same period. (2) With 270,000 agents in 200 countries, it is more than three-times bigger than Moneygram International Inc. (MGI), its closest competitor. (3) Profit margins are a healthy 25% due to high service charges. (4) Key markets like Asia, India, Africa, and Russia are growing fast. (5) Established businesses that are spun off tend to outperform. (6) In the spinoff process WU management received stock options that are only profitable at levels above current prices (incentive!). Weaknesses: (1) Recent U.S. talk of a crackdown on illegal immigration has already led to reduced U.S.-Mexico transfers (10% of WU's current revenue) as potential customers fear government scrutiny; serious immigration reform could do worse damage. (2) Last month transfer records were subpoenaed; although WU won a stay until Oct. 16, at best the company will need to spend money to allay the fears of immigrant communities. Summary: At current prices, WU trades for about 18 P/E, not cheap, but a good deal for such a steady, low-capital-intensity business; it will be profitable to investors who stick with it through a potentially rocky short-term.
Quick comment: Unlike WU, Corrections Corp. of America (CXW) is a stock with a positive correlation to the Department of Homeland Security's Immigration and Customs Enforcement [ICE] initiative • Wal-Mart Stores Inc. (WMT), through its partnership with MGI, has aggressive plans to expand its financial services business • WU is scheduled to issue its first earnings statement on Tue. Oct. 24. • Reuters headlined the Barron's article, conveying its positive spin.