Western Union: Moving in the Right Direction

On Saturday morning in Barron’s, Michael Santoli pointed out two potential challenges for Western Union (WU) that are both only potentials and future.

U.S.THERE ARE TWO MAIN knocks on Western Union, neither one new. The first is that a federal immigration crackdown will crimp money transfers back home from foreign-born U.S. residents. The other is that emerging online and cellphone payment technologies will eat into volumes on its transfer-agent network.

He also pointed to some interesting developments. I had posed the questions in my last post about how much more efficiency (WU) could achieve, and how can the firm plans to penetrate new markets effectively taking a leadership role. Apparently Google (GOOG) is helping the situation. As a holder of Google I am pleased to see the partnership of these two behemoths.

ChinaWestern UnionWestern UnionAn unpublicized deal for Google to pay for Western Union money transfers for its AdSense members in nine South American and Asian countries (including China) argues against the latter concern. Quietly, Google has begun offering the Western Union payment option to owners of Websites sharing in Google ad revenue, who typically are paid with checks that can be lost or stolen. Though the financial impact of the effort is unclear for Western Union, this represents incremental business in a fast-growing segment not now built into Street assumptions.

Barron's last year highlighted Western Union's dominant market share, 25% profit margins and impressive secular-growth tailwinds, but said investors would need patience ("Western UnionMexico Calling," Oct. 9, 2006). The stock, around 20, has been flat, and is currently reasonably valued near 16-times 2008 forecasts. The company is now lapping weaker Mexico volumes, a plus. And any tacit endorsement by Google of this 19th-century name can't hurt, either.

As I wrote just a few weeks ago, WU is seeking new ways to increase both its top, and bottom line. We see this as movement in the right direction. Taking a company founded in 1851 based on communications innovation, and partnering with a darling of today’s information age shows real promise.

Disclosure: Mr. Corn is CEO of Clear Indexes LLC and Clear Asset Management Inc. Western Union (WU) is a constituent in the Clear Spin-Off Index licensed for the ETF (CSD). Google (GOOG) is a holding in the Clear Large Cap Growth portfolio. Mr. Corn owns shares of the ETF (CSD) and shares of (GOOG) directly through his participation in the portfolio.