I took advantage of prices near recent and all-time lows to increase my Western Union (NYSE:WU) position to a more typical weighting (4-6%).
WU was spun out of First Data (recently taken private) and since I have held FDC in many of my portfolios for many years, I received WU in the spinoff and have bought more on several occasions.
WU is a play on increasing immigration - both cross border and within developing nations. It boasts one of the most recognized brand names worldwide, built on over 150 years of trust. Money transfers are WU's main business, and as immigration worldwide increases, so will money transfers from immigrant workers to family back home. WU collects a nice fee for this service, yet customers are willing to pay for the trusted brand and convenience WU provides vs other choices.
Because WU is the largest money transfer provider worldwide (by a factor of 3) with over 300000 agent locations, an immigrant attempting to transfer money to a remote location in a developing country is much more likely to find a WU agent near his relatives. So WU enjoys a network effect - each agent it adds enhances the value of the entire network. Plus it has a scale advantage - it is the low cost provider yet can charge a premium based on its brand equity and network scale.
Overseas agent growth is exploding, especially in India and China. This is still a very small part of the business, but a great long term opportunity. Currently, Chinese agents aren't allowed to effect transfers within China, but over time I believe they will be awarded this ability, opening up a huge market where migrants to industrialized regions in China transfer money back to rural regions. It only costs WU about $1-2000 to open a branch location in these regions, so the economics are potentially fantastic.
WU clearly has a moat around its business castle in the form of its brand and agent network. It would be nearly impossible to duplicate these advantages. On top of this, the economics of the business are fantastic. The business converts more than 20% of revenues to free cash. Returns on invested capital are huge as the business requires relatively little additional capital to grow. As a result of the spinout from FDC, WU was saddled with about $3B of debt but its huge free cash generation will allow it to pay this down quickly, at which time look for them to return more capital to shareholders.
Current valuation looks quite attractive for such a superior business. It is trading at less than 16x next year's consensus estimates, and WU has the ability to generate free cash in amounts greater than earnings, so it is even cheaper on a free cash basis. My conservative discounted cash flow models, assuming low double digit top line growth declining over the next 10 years, indicate that at current levels WU is trading at about 60% of intrinsic value.
What's the catch? The market is concerned about a couple of issues. Immigration reform could reduce outbound transfers from the US. There was also an issue in AZ where authorities were looking to seize money transfer to Mexico as part of illegal immigration and drug smuggling investigations. This certainly created a trust issue in this corridor, but early this year the courts sided with WU. As the largest provider, WU is the compliance leader, and maintaining regulatory standards regarding money laundering etc. is far easier for them than it is for "Joe's money transfers". As big as WU is they still only have about 17% of a market that remains highly fragmented, with "Joe" and his buddies still maintaining a sizable but vulnerable and declining share. And the overall market is growing at mid-single digits at least.
Another issue is the possibility of alternate transfer conduits becoming prevalent. WU largely caters to the "unbanked". I believe that the majority of these folks are "unbankable", and hence banks won't be able to make much headway here. WU is actively pursuing additional channels as well, including cell phone transfers and a recent agreement with Yodlee to expedite online bill pay services.
As usual, I have no idea what WU's stock will do near term. They report earnings next Tuesday and anything could happen, although my gut tells me it'll be a non-event with a small possibility for a positive surprise. No matter, long term I think this is a great investment.
Full disclosure - I own WU in many of my other managed portfolios and have for some time - these positions are subject to change at any time.