Why Western Union Is A Compelling Long-Term Buy

| About: The Western (WU)

The Western Union Co’s (NYSE:WU) services acts as a third party which allows electronic payments by consumers to businesses, utilities, finance companies, etc. Its network of nearly 500,000 worldwide agent locations also handle cross border transactions and money transfers in multiple currencies. These are all services that allow today’s modern businesses and consumer to continue to operate in an environment that is increasingly internet led.

WU shares are currently trading around $17, and the mean 12 month price target from analysts researching the stock is $23.25 (36% upside potential). This stock is trading above its 50-day exponential moving average of $16.57, having broken above this line last week. This move is very bullish on the chart, and has given strength to the break from its 12-month low of $14.55 set at the beginning of October. A break above the 200-day EMA of $18.15 may be made sooner rather than later. A series of lower lows and lower highs that led to the 12-month low has been broken..

Earnings per share for the last 12 months are $1.47, and these are expected to reach $1.72 in its next fiscal year (ending Dec 2012). These numbers place the shares on a trailing price to earnings ratio of 11.69, and a forward multiple of 9.99. American Express (NYSE:AXP) shares trade on a trailing price to earnings ratio of 12.15, and a forward multiple of 11.79. Competitor Moneygram International Inc’s (NYSE:MGI) shares trade on a forward price to earnings multiple of 15.87.

For investors looking at dividend paying stocks, WU’s payment of a dividend of $0.32 last year gives the stock a yield of 1.90%, which is covered 4.5 times by its earnings. The company has paid a dividend since 2006, and increased the dividend for the last two years.

Current operating margin at WU is 26.14%, with a return on assets of 11.35% and a return on equity of 245.10%. This compares favorably to AXP’s return on equity of 28.12%, and operating margin of 21.17%.

The current revenue from WU’s income statement is $5.34 billion, and last quarter’s revenue showed year on year growth of 7.30%. WU has cash of $2.11 billion, and a total of $3.59 billion in debt. The company’s debt/ equity ratio is 946.43, far higher than AXP’s 366.67. High ratios in this type of company are a natural feature of their business, and WU’s cash flow of $1.17 billion makes this manageable.

Looking at the 12-month chart, shareholders in WU have had a tough time through the last the period. Shares have under-performed the S&P 500 Index, and are even further behind in relative performance against AXP shares. However, I expect some re-balancing of this under-performance now that the downward trend in the share price has been broken and the shares are again trading above the 50-day EMA.

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Recently, the share price has been driven forward by several news releases that should prove positive for the company:

  1. More banks are partnering with Western Union and marketing WU’s services in branch and online. Read more here;
  2. WU has signed an agreement with 7-Eleven, allowing consumers to obtain WU cards in its 7-Eleven stores; and
  3. Visa (NYSE:V) and MasterCard (NYSE:MA) are being sued for alleged price fixing and anti competitive behaviour on ATM’s. If proven, this will be very positive for competitors such as WU.

Overall, the trading pattern of WU shares, along with its strong fundamentals lead me to consider this is a stock that has turned the corner of share price declines. Its forward price to earnings ratio is in line with competitors, and its dividend policy should prove attractive to would be shareholders. Positive news flow is likely to continue, as banks and others look to partner further with WU and consumers increase their use of its electronic services when trading online. BUY.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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