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Western Union (NYSE:WU) and Moneygram (NASDAQ:MGI) share a relative duopoly in the cash transfer business. They are two companies that have the scale needed to make an international money transfer business effective. MGI has 207,000 banking locations worldwide, WU has 435,000, and both are consistently expanding. The financial crisis and subsequent recovery has placed these companies in a strong position. It is likely that both will beat expectations in their next earnings announcement Q4 2010. Western Union’s announcement comes at the market close on February 1st, and Moneygram’s is on February 4th at 8AM CT.

Most customers of these two companies are people who are not fully served by traditional financial institutions. This includes many immigrants and those in lower income brackets. With all the shakeups in various third world countries, immigration is happening more than ever. When immigrants get good work, they send money back to their families in their native countries. The United States is a prime example. Mexican immigrants consistently use Western Union and Moneygram to send money back to their families in Mexico.

“9% of our total business would be U.S. to Mexico … We love the positive trend we saw and continued stepping up of our U.S. outbound, but when you look at the strength of our U.S. network, there’s a lot more there that we need to be getting out of U.S. outbound”, said Pam Patsley, CEO of Moneygram on their Q3 2010 earnings call (see transcript here).

Low wage jobs have dominated the US recovery as described in this article.

Among these jobs with the highest gains are health aides, food preparation, and construction, and these are the types of jobs immigrants generally do. The Commerce Department announced construction spending increased Construction spending rose 0.7 percent in October. It rose 0.4 percent in November to an annual rate of $810.2 billion, reaching the highest level since June. This increase marks the third consecutive month of gains.

Where there is gambling, Western Union and Moneygram are used in abundance. Las Vegas had a dismal year overall in 2010, but in this last quarter gambling revenue was up 15%. Macau showed consistant huge growth, soaring 58% in 2010 and another 30% rise forecast for 2011. Online gambling is still as popular as ever. Western Union and Moneygram are common ways to deposit and withdraw money from online gambling sites as most banks won’t do business with them.

Other positive signs for Western Union is it increased its dividend 17% on December 20th. Something the company wouldn’t do if it were struggling in the quarter.

Western Union has expanded a lot in 2010 and started many new programs that would probably kick in full swing in this latest quarter. It has also given hundreds of thousands of dollars to charities. Here is a list of their press releases for the year.

Positive Signs for Moneygram

Moneygram puts Western Union to shame with its donations. Being approximately 1/65th the size of WU in market cap, it donated more money in 2010, well over $1 million. They donated to places where they have business contacts and want to expand, so there is a selfish interest there. However, being a small company with a lot of debt, I don’t think I would have lent that much. But you have to respect the confidence of the MGI team.

On January 19, 2011, it increased its executive team by two by hiring two senior vice presidents. Not a sign of a struggling company.

MGI has consistently bit away at its debt load, including a $75 million prepayment this quarter.

This last quarter alone, it has added 1350 locations in China, 8000 in Russia, and 4200 in India. A list of its 2010 press releases are here.

On a side note, MGI has pulled back about 15% since the beginning of this month for no apparent reason which includes an 8% drop in one day because of the Egypt protests. Unexplained pullbacks often happen with small cap stocks like MGI, and this could be a good entry point.

Disclosure: I am long WU and MGI

Source: Expecting Western Union, Moneygram to Beat Q4 Earnings Expectations