Buy Western Union At 3-Year Lows

| About: The Western (WU)

Western Union (NYSE:WU) reported an earnings per share figure that met analysts' expectations for earnings, but it missed its revenue estimates. The company disclosed its third quarter performance on October 30, 2012. Against an expectation of $0.45 per share, the company posted earnings per share of $0.45 per share. This was despite a revenue figure of $1.4 billion, which remained around 7% behind expectations of $1.5 billion. WU also reduced its guidance that resulted in share price being cut to one third. We think this is a very good entry point for long term investors who want to benefit from the expanding network for consumer money transfer.

The company generated a top line, before adjusting for constant currency, of $1.42 billion during the third quarter of the current year, as compared to $1.41 billion at the end of the third quarter of the prior year. Similarly, operating income edged up 1% YoY to $366 million at the end of the most recent quarter. The bottom line of $270 million surged 12% from a year ago. This improvement in the bottom line, when compared year over year, was a result of strong online business and higher foreign exchange revenues, partially offset by compliance related issues and a sluggish global economic growth.

The following table gives a snapshot of the company's performance during the third quarter of the current year.

Total revenues edged up 1% YoY on an 18% YoY surge in foreign exchange revenues, partially offset by a 3% decline in transaction fees and 8% decline in other revenues.

Cost of services remained flat at around $800 million, while selling, general and administrative expenses surged 5% YoY, leading to an overall 5% increase in expenses.

Segmental Analysis

For the purpose of reporting, the company has classified its operations into three business segments; Consumer to Consumer, Consumer to Business and Business Solutions. The company relies heavily on its Consumer to Consumer business segment for revenues, with 81% of entire revenues coming from this segment. However, only the Business Solution segment, which also has the smallest contribution to the company's revenues, posted higher revenues compared to the same quarter of the previous year.

Revenues, before adjusting for constant currency for the Consumer to Consumer business segment, plunged 4% year over year to $1.15 billion. Revenues from all geographical regions declined, however, only online revenues advanced 22%, after adjusting for constant currency. The largest revenue decline was witnessed in the European and CIS region, where revenues declined 9% year over year.

Consumer to Business segment is the second largest business segment when it comes to generating revenues for the company. During the third quarter, the segment generated revenues of $147 million, a drop of around 4% compared to the same quarter of the previous year. On a constant currency basis, revenues declined 1% YoY.

The Business Solution segment was the only business segment that posted higher revenues compared to a year ago.

Future Guidance

Owing to a sluggish global economic growth and increased competition, the company slashed its guidance for full year earnings from the range of $1.68 - 1.72 per share to $1.6 - $1.63 per share. Share price fell immediately to $12.8 after the announcement of the revised guidance. This is the lowest in 3 years.

Going forward, we believe the company will benefit from the expansion in its network of consumer money transfer, the addition of new online capabilities, its expansion through inclusion of new geographical areas into its network, and the focus on its Business to Business segment. The company has disclosed elaborate strategic plans to make its market share grow, by improving customer value proposition, inducing growth in its digital (online) business, and implementing cost saving and productivity enhancing initiatives. These initiatives may have the impact of creating downward pressure on the company's bottom line in the near future, however, Western Union will benefit from them in the long term. We also believe the worst has been priced in, as the stock plunges to its 3-year low. This dip provides a perfect buying opportunity for investors. Therefore, we recommend long term investors to buy the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Personal Services
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here