The Western Union Company (WU) provides money movement and payment services worldwide. With approximately 510,000 agent locations in 200 countries and territories worldwide, this 160-year-old company (public only since 2006) has become an industry leader.
WU offers services in 4 different segments:
- Consumer to consumer: represents 81% of the company's revenue. Aimed to enable those without a bank account ("unbanked", "underserved") to transfer money around the globe. These services are extremely popular with temporary employees who migrate to developed economies and wish to send their hard earned money to their families back home; often neither side owns a bank account.
- Consumer to business - represents 11% of the company's revenue. These services enable consumer to send payments for utility bills, loans, mortgages etc. to service providers or government entities worldwide.
- Business to business - represents 6% of the company's revenue. This segment offers various yet simple ways to transfer payments between firms on a 24/7 basis worldwide.
- Other services - these services represent 2% of revenues and include money orders, prepaid cards and services.
Some metrics as of Oct. 2, 2012:
- Market cap: $11 billion
- Dividend Yield: 2.2%, dividends have increased since 2008
- Dividend payout ratio: 19%
- Current ratio: 0.57
- Price / book ratio: 10.41
- PEG: 0.93
- Insider activity: over the last two years insiders have only sold the stock, but not at material amounts
- Management predicts EPS of $1.68-$1.72 per share; based on the current price that's a forward P/E of 10. The average P/E analyst forecast for 2013 is 1.91.
- Management predicts cash flow from operations of $1.1B - $1.2B. Considering a negative $3.4 working capital, P/FCF for 2012 should be around 13.
- Analyst estimates predict next 5 years growth of 11% annually.
WU enjoys a strong cash flow and uses it to return piles of money to its shareholders through dividends and share buybacks: $900 million in 2011, $430 million in H1 2012. However, I would rather have management use the free cash differently: decrease debt first substantially and change debt mix from short term to long term. That would strengthen the balance sheet and help the company prepare for worse scenarios that could arrive.
An investment in WU has several pros and cons:
Perhaps the biggest risk to WU's business model and future profits is in future technology. Several years into the future, payments through the smartphone (electronic wallet) should be all around us. That means that instead of the employee in the USA walking into WU's office to send money to his family - he will be able to wire it from his smartphone to his family's smartphone back home. However:
- WU invests in cooperations and joint ventures, mainly with telecoms, to prepare for these new technologies. Although today these channels only represent 2% of revenues, growth for these channels has been 26% in H1 2012. WU's management intends to reach $500 million revenue from these channels by 2015.
- The population using WU's services on both sides is usually not strong. Chances are they will be among the last populations to adopt these new technologies.
- In developing economies there may be lack of infrastructure to adopt such technologies. Even if the employee in the developed country will wire funds from smartphone to smartphone - his receiving family member might have a problem changing his smartphone balance to actual money. He may still have to walk into WU's office to receive his balance.
- WU is constantly decreasing its rates. That results, of course, in decreasing profitability per transaction, but also makes it less appealing to develop new technologies as the developer's potential profits decrease as well.
Another risk worth mentioning is global economy. The effect on the company could be for example fewer employers willing to hire employees from undeveloped countries, resulting in fewer transactions for WU's branches. It can be easily seen on the company's financials that in economically beaten territories, revenues have decreased recently. Given my generally bearish opinions, I expect this headwind will be here in the next few years as well. I suspect this is not yet fully priced into the stock.
Taking it all into account, I believe at current price levels WU is a "hold." Though WU enjoys an impressive cash flow, I see no immediate trigger for a short-term jump in price, especially due to the general global economic situation. We may even see a decline in results and fundamentals.
Having said that, considering management's focus on value creation, money repayment to shareholders and preparation for future risks -- I think WU makes an interesting long-term play, but only after we see a price correction of the stock.