Western Union Is Ready To Recover

| About: The Western (WU)
This article is now exclusive for PRO subscribers.

Recently, Barron's has suggested that Western Union (NYSE:WU), the money transfer and bill payment services company, is looking at a strong growth period in FY14 as it expects to maintain its guidance for this year and hopes to improve its performance. The report suggests that the target price should be around the low $20 range. The report identifies a reduction in price as the catalyst for stock price appreciation; however, there are a number of other factors at play for Western Union. The company is invested in the idea of growth through new technology and this approach is likely to prove prolific given the inviting stance of the global economy towards such strategies. The overall growth in migration and remittances also has a pivotal role in the performance of the company. Lastly, a number of risk factors also need to be considered in order to evaluate the future prospects of Western Union.

The operations of the business are divided into three major segments, which include consumer-to-consumer (C2C), consumer-to-business (C2B) and business solutions. C2C was the largest segment of the business as it contributed to 81% of total revenues in FY12. The segment is based on an integrated global network, which is spread across various countries in order to support the transfer of money among consumers. The primary revenue source is a transaction fee charged to the consumer. Major competitors are companies such as like American Express (NYSE:AXP) and MoneyGram International (NYSE:MGI).

Remittances Market

The remittances market has shown a consistent growth in recent periods. Specifically since FY10, the cross-border remittances have improved substantially as growth in emerging markets continues to support globalization.

The above chart shows that the outlook of the global economy and the increased globalization is likely to support a sizable and consistent growth in cross-border remittances averaging above 6% in the coming years. These projections suggest that the business activities of Western Union will be supported by the industry as the company aims to improve its growth.

Growth Drivers: Lower Prices & New Technology

Western Union has adapted a strategy of price cuts in order to maintain its position in the industry as other competitors, specifically MoneyGram, aim to take over Western Union's market share of 15% in the consumer market. The company's strong brand, and global recognition will support its price cuts and improve its position in the market. Similarly, strong growth is expected from the company's proposition of investments in new technology. For example, addition of mobile technology has the capacity to substantially increase the business of money transfers as the process is made more convenient for all customers. A number of research studies have suggested that mobile technology has the capacity to tap into a sizable sum of revenues, which have been stuck in demographic inconveniences. Western Union's study has also produced similar results by stating that the use of mobile bill payment is set to grow.

What Should Investors Consider?

The first and foremost notion for investors to consider is that the company is in a transitional phase. This means that the future growth prospects are not being reflected in the stock price as yet. Investors should consider this as a decent buying opportunity as the splash from previous results is momentarily keeping the stock price low. On the other hand, growth prospects such as price cuts, projected market growth, improvement in market share and introduction of innovative technology are likely to appreciate the stock price of the company.

The above chart also shows that the company has held its position towards addressing investor considerations. In FY12, the company returned a total of $254 million in dividends and this figure is expected to increase to $300 million.

Potential Risk Factors

Despite the strong upside projected in the above factors, the company's growth outlook is subject to some risk factors, which need to be considered in order to aptly evaluate the company as a prospective investment for equity investors. Firstly, in order to induce growth, the company will have to surrender its stable financial policy to a more rigorous one. For this reason, Moody's has downgraded the credit standing of the company and the outlook has been changed to negative for FY13; however, the growth prospects of FY14 have not been considered. Similarly, a downturn in the global economic growth can have adverse effects on the sustenance of profits for Western Union.


Keeping the above factors in view, a buy recommendation is proposed for long-term investors as the share price is contained in a downswing for now. This provides a good buying opportunity as the improvement in the standing and performance of the company, specifically after FY13, is likely to result in a lucrative price appreciation for investors. The risk factors and the association of the business to the financial services industry make the investment risky, but the future prospects of the company are promising. The company is expected to come out of its transitional period as a strong opportunity for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.