Western Union: A Spin-Off With Value

Includes: CSD, WU
by: Andrew Corn

Western Union (NYSE:WU) is a constituent of the index we publish that is tracked by the Claymore/Clear Spin-off ETF (NYSEARCA:CSD). It is also (for full disclosure) a holding, since mid-August, in the actively managed Clear Large Cap Value portfolio. The company is a provider of bill payment and money transfer services, and was spun-off from First Data (NYSE:FDC) in October 2006.

First Data, a $25 billion U.S.-based electronic commerce and payment service provider originally acquired WU in 1994 through the acquisition of Financial Management Corp. Western Union had been acquired by Financial Management Corp. one year earlier. According to First Data, the Western Union spin-off in 2006 provided both FDC and WU the opportunity to focus on their core competencies and businesses.

The justification for the spin-off provided by FDC supports Clear's basic investment thesis for spin-offs. Other facets of our thesis which we believe benefit's WU are: aligned compensation for performance of senior and junior managers at the firm, elimination of the conglomerate discount, and increased transparency for investors and analysts. When taken together, these factors yield a better understanding of the firm which can best lead to fair valuation.

The New York and Mississippi Valley Printing Telegraph Company was the original name for Western Union when it was founded in 1851. The firm changed its name to Western Union Telegraph Company in 1856 at the insistence of Ezra Cornell, one of the founders of Cornell University, to signify the joining of telegraph lines from coast to coast. In 1884, 28 years after the name change, Western Union was one of eleven stocks included in the first Dow Jones Average.

Although it is a spin-off, WU is already the 800 pound guerrilla on the money transfer playground. With a market capitalization of $15.29 Billion, it overshadows its largest competitors Checkfree Corp (OTC:CHFR) at $4.1 Billion, and Moneygram International Inc. (NASDAQ:MGI) at $1.65 Billion. With its 150 year history and recent solid financials post spin-off, the company appears to be strong going it alone.

Looking at the statistic requires some digging. Its most recent quarterly revenue growth of only 8.0% lags some of its smaller competitors. Looking carefully at the numbers, there are more than 312,000 Western Union Agents in over 200 countries and territories. Western Union produces an industry leading $788,136 of revenue per employee. The business is showing efficient use of this revenue through its trailing 12 month operation margin of 27.96% which trounces its competition. Additional supporting data points include a trailing 12 month Return on Equity of a 55.12%, and Return on Assets of 15.74%.

These impressive numbers also require further analysis. WU's success is somewhat due to the scale it has achieved. The money transfer industry has high fixed, and fairly low variable costs. As a result, it is advantageous for established companies such as WU to expand into as many regions and markets as possible. WU has the business model, credibility, and finances to do so at a fairly quick clip. Illustrating this is the recent signing of an agreement with EGT that outlines plans to build and maintain 500 additional facilities in Chile. This summer, Western Union also announced that its service in Mexico will now be available at an additional 410 locations. This brings its number of branded Western Union sites, and its affiliates there to 13,700.

As Western Union expands internationally, the company is maintaining its history of corporate responsibility which enhances it brand. Its charitable assistance programs, such as the 4+1 program, was implemented in Mexico and brought support at the grass-roots level where many of its customers operate.

As for the stock's valuation, there is evidence that it may very well be undervalued. WU sports about an average price to earnings (P/E) ratio compared to its closest competition, yet it is more profitable. When looking at a since spin-off chart, it is apparent that traders have not been hot on the stock since the spin-off. More recently, looking at one, two and three month charts versus the S&P 500 tells a different story. After the stock was hit along with any firm with the word "financial" associated with it mid-summer, the stock has out-performed.

The market is now wondering, as an already efficient company, is its profit generation almost fairly priced? Additionally, considering its formidable size, can it open up enough markets to move the needle on revenue growth?

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