The Long Case for Western Union: Like Wiring Money Into Your Portfolio

Jan.23.07 | About: The Western (WU)

The Western Union Co. (NYSE:WU) has over 270,000 locations globally in just about every country in the world. In fact, 80% of the locations are outside of the U.S. Western Union is perfectly positioned to enjoy the continued trend of cross-border commerce.

This company handles transfers of money between businesses, and it is the trusted global standard it sets that drives its market dominance and continued growth -- especially in the emerging markets. I am always asked how to play the China opportunity. Well, this is a way to invest in the growth of China's commerce and expanding economy. Just as Western Union is synonymous with trusted money transferring in the United States, it is the same in China, India and Latin America.

In fact, if you have ever wired money to a relative, friend or a company, chances are you used Western Union. Like Q-Tips or Band Aids, Western Union's name is virtually synonymous with its product. The company was spun off from its parent First Data Corp. (NYSE:FDC) in September 2006.

Western Union is one of those few companies that benefits from both institutional (i.e., commercial) and individual customers.

In addition, a huge part of Western Union's business comes from immigrants who need to wire money home to their families. Many of these individual customers are from Latin America and other emerging countries -- each time someone sends money home, Western Union gets a piece of the action. Its fees are sizable and, ultimately, are reflected in a $21.00 stock price that will easily hit $30.00 by the end of 2007.

Revenues have been impressive and climbing steadily over the past few years, including 13% for the first nine months of 2006. Profits have also been extremely high with operating margins often above 30%. The company is run by CEO Christina Gold, a former high-level Avon executive who was in charge of Western Union before the spin-off. (She should have been made the CEO of Avon, but that's another story.) Whenever I question corporate types on their vote for the best female executive, Ms. Gold is consistently mentioned as the leading choice.

There are some things that WU needs to worry about. Regulatory costs have risen as the government has cracked down on money laundering and terrorist financing, and if immigration is curtailed or the economy goes negative, the company is likely to lose customers. Overhead costs are now higher than when the company was part of a larger parent. However, the company recently won a lawsuit against the state of Arizona, which was attempting to claim a portion of the monies being sent over the border by immigrants. WU's size will lessen the impact of the regulatory costs, its huge cash flows will help make the debt less burdensome, and its profits are big enough to take a bit of a blow. And immigration doesn't seem likely to wane anytime soon, especially with the Democrats in power.

Western Union is due to announce its fourth-quarter earnings at the end of January, and the market will be watching this company very closely. If results are strong, this stock should jump quickly.

WU since its spinoff

WU 1-yr chart

Type of stock: A trusted, global brand name company that generates huge cash flows and profits.

Price target: The stock has been trading on its own for a few months now, and it has already climbed from just under $17 to almost $22. I think it's going to be one of 2007's big winners. Buy now and you will see this stock hit $30 by year's end.