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Why I'm bullish on Western Union

October 29, 2010 | About:
Hat Tip to Ravi Nagarajan for bringing this to my attention. http://www.gurufocus.com/news.php?id=110993

For many decades, migrant workers have been willing to pay Western Union (WU) a significant fee to send home (remit) relatively small sums of money. WU is by far the oldest and largest player in this business. Its brand is well recognised and respected. It has by far the greatest number of corridors to transfer small sums to and between underdeveloped countries safely and quickly. http://en.wikipedia.org/wiki/Western_union


Thesis

Western Union (WU) is a wonderful business at an attractive price.


Is the price attractive ?

I use round numbers, my source for the numbers in this case is gurufocus. The numbers are in line with the SEC filings. Since it was spun out of FDC, WU generated about $ 1B p/a of FCF under terrible conditions. Millions of migrant workers have lost their source of income. Meanwhile the company spent about $ 0.5B annually on capex. Interestingly, capex is more than PP&E ! From the high level of capex, we deduce FCF understates owner earnings. With a market cap of $ 12B, let's say WU has an earnings yield of 10%.


Is this a Wonderful business ?

ROE, ROA, ROTA, ROIC, ROCE, CROIC…… I leave it as an exercise to the reader to come up with precise numbers but they will be satisfactory. We conclude that a dollar retained in WU generates satisfactory returns. Alas, Western Union does not have enough opportunities to retain all the dollars it earns. The company has spent $ 0.6B annually buying back shares. It also paid a hefty $ 3B dividend to its former parent (FirstData corp FDC). This $ 12B company has returned ± $ 7B to its owners in 5 years.

But that's just numbers… what actually drives this business ? Simple..... WU profits from charges associated with the principal being transferred as well as income derived from a spread between the exchange rate used in the transfer and the exchange rate that the company pays.

In practice WU goes to say ..... Uganda with $ 50m and hands those dollars to the local authorities (a term I use losely to include post offices and big banks). In the case of Uganda, the dollars are converted to Shillings at a rate that is somewhat profitable to Western Union and very profitable to the local authorities. The money is then "virtually deposited" at local points of presence. The money is released as soon as a migrant worker abroad pays. It's in the interest of all parties in the network to make sure the money runs out quickly. For some reason, the Shilling always becomes more expensive round christmas and at the start of school years. This is when migrant workers send home money. Migrant workers in the US pay fees in the US so earnings are not locked out like with other highly profitable global franchises. As a percentage of Ugandan GDP, remittances are > 5%.

http://siteresources.worldbank.org/INTPAYMENTREMMITTANCE/Resources/New_Remittance_Report.pdf

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1110315015165/RemittancesData_Nov07.xls

This is a winner-take-all business.... the two major expenses are commissions (a % of revenue) and SG&A and Marketing (fixed). WU has higher margins because:

1) The company can charge higher prices, making commissions a lower percentage of revenue, because it has better brand recognition and more options to offer customers. Moneygram for example states that their strategy is to undercut WU. Alas, commissions paid to agents must be comparable to attract and retain quality agents.

2) WU is 4 times the size of its closest competitor (MGI) making the fixed cost component a much smaller percentage of revenue.

In short, as WU grows, so do its competitive advantages. A wonderful business.


What are bears saying ?

1) Innovative technology.

Mr. Market worries that business of transferring cash abroad is a "newspaper business". WU saw the arrival of such trivial innovations as trains, (jet)planes, automobiles, credit cards, phones, the Interweb.... but now we have smartphones and Google.... this time is different ! http://www.vrl-financial-news.com/bpa/banking--payments-asia/issues/bpa-2009/bpa6/innovations-to-drive-remittanc.aspx

2) GAAP.

Mr. Market says it's no bargain. p/e = 14 p/b = 25 p/s = 2.3 financial services..... ehm next stock.

3) We have a motivated seller. http://www.gurufocus.com/forum/read.php?2,110537


Why are the bears wrong ?

1) Smartphones and Paypal. Let's see if we can get a thread going... IMHO mr. Market confuses WU with a company that sells wallets.

Bears argue that as more customers in developing countries obtain cellular phones with increasingly sophisticated capabilities, the need for physical agency locations diminishes. For example, typical PayPal fees for international transfers are in the 4 percent range. Well....

- There is a dig difference between developing countries and underdeveloped countries. Migrant workers know this.... Eritrea in the eighties, Zimbabwe now.

- Also, who is going to pay for that smartphone in the first place ?

- And guess who has got the greatest number of prepaid cards outstanding in the migrant community ? No bank account required...

- Lasty, the franchise value is in the relationship with local authorities. It's usually the local "authorities" that run the local network. Post offices In Pakistan and India to name just two. If the local network can get the stream of money to the recipient faster (digitally) and with fewer points of presence.... great. It's very much in their interest. The franchise value of WU is not in the number of points of presence, it's in the number of profitable corridors it "owns".

http://siteresources.worldbank.org/EXTDECPROSPECTS/Resources/476882-1157133580628/BriefingNote3.pdf

http://www.migrationinformation.org/Feature/display.cfm?id=704

http://www.westernunion.com/WUCOMWEB/staticMid.do?method=load&countryCode=US&languageCode=en&pagename=HomePage

2) GAAP..... WU has been expanding aggressively. As it deposits (or lends) money to its foreign partners the cost is expensed immediately while the revenue is recognised as migrant workers actually pay for the service provided. GAAP earnings are understated. As for book value..... this is a high ROE business. Book value can and does go negative; compare this to MCO.

3) The motivated seller may become a buyer in the near future just with more funds and less turnover.


Growth.

WU is the largest player by far. It has a 20% market share. It competes directly with MGI which has a 5% market share. MGI however fooled around with subprime stuff and has had problems since 07. http://www.smartmoney.com/investing/stocks/moneygram-awaits-rescue-after-debt-fiasco-22405/

As I have explained, cold cash is important to secure relations in the underdeveloped countries with the high margins and long-term prospects. Mexico used to be the place to be in the eighties for this business. Now that there are many businesses with networks crossing the US/Mexican border, that corridor is less profitable. MGI uses the network of Walmart between Mexico and the US to compete. WU on the other hand owns its own network in corners of the world where it matters most. Over the next few years, WU will take market share from MGI because MGI is strapped for cash.

In the long term, underdeveloped countries can develop. Revenue rises and margins fall as a country does more business with the country migrant workers went to. This is the game WU has been playing for more than a century. At first within the US now internationally. WU forges its relationships in the least developed countries. No big deals in Mexico with Walmart... what you need for the long term is small deals in Benin, Uganda, Haiti and not so small deals in Bangladesh and Sri Lanka.


Specific risk

- Rapidly appreciating dollar; WU buys foreign currency upfront.

- Scare or actual mistake damaging the brand.

- Venezuela type risk.

- Credit risk of partners.

- The 789342 other risks I have not thought of yet.

Any and all questions welcome as usual.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.8/5 (21 votes)

Comments

jhodges72
Jhodges72 - 3 years ago
Good analysis and strong argument, however, I have one question. When was the last time you or someone you know use their services? For me, it was approximately 18 years ago. I don't believe a moat exists to the same degree as you. WU fee's are between 8% - 12% to send money from U.S. to canada, for example. If you used paypal, the fee is low as FREE. I honestly don't know how Western Union still exists today. I have yet to research the company in detail. I may have to because I'd like to know how they're still around.
batbeer2
Batbeer2 premium member - 3 years ago
Hi Jhodges72,

Thanks for the compliment and the questions.

When was the last time you or someone you know use their services?

Never. Then again, I'm not a migrant worker.

WU fee's are between 8% - 12% to send money from U.S. to canada, for example.

Yes. However, I think of it in absolute terms as well. It probably costs $ 15 in fees to send any amount to some corner of the earth. The fee is insignificant for greater amounts relative to the spread in exchange rates. The problem migrant workers have is that the amounts they send are smaller.

If you find anything interesting, please share.

jhodges72
Jhodges72 - 3 years ago
So, your focus is on the migrant worker correct? Do you believe that population is growing with the recent growth in securing our borders?
superguru
Superguru - 3 years ago
What % of WU profits come from US & Canada region?

Is there growth rate per region data for WU?

jhodges72
Jhodges72 - 3 years ago
Incidentally, the spread related to exchange conversions represent 17.91% of their total revenue for last year. So, I'm guessing those exchange rate revenue's aren't your primary focus. That is why I'm proposing that a service such as PayPal, who can also transact money world wide and for a fee as low as FREE may pose a threat to WU's barriers to entry because a large moat isn't represented by 17.91%
jhodges72
Jhodges72 - 3 years ago
I'm not saying WU isn't a good business run by able and competent management. I just don't believe it is at a value price currently. If this were May 09', I'd have a different opinion.
jhodges72
Jhodges72 - 3 years ago
Also, WU has consistently earned in the $1.10 - $1.20 per share range since 2005. Regardless of Revenue growth or not. I personally like to see a long history of Earnings Growth for a large company. I don't like typing up my money only to receive 4% on my money per year. Which right off the bat is my opinion of WU. In my opinion, at $10 per share WU becomes very attractive.
superguru
Superguru - 3 years ago
I am guessing most of Western Union users (both senders and receivers) are not very internet savvy and do not have a bank account. Paypal serves a different user base I think.

I have never used WU, but afaik the receiver can pick money from the destination agent without needing a bank account.

rgosalia
Rgosalia - 3 years ago
I send money often from the US to India. I have always used Western Union. I am internet savvy, but my family at the receiving end is not. They prefer going to a physical location to pick up the funds. Western Union has the widest network. I am not sure how comfortable my family would be with receiving money through a Paypal account. I have considered other money transfer services like Xoom, but it only allows deposits at a bank. My family prefers the Western Union because of immediate availability at hundreds of non-bank locations throughout the city that they live in. The fund transfers have usually been at times of emergency.

As long as people in emerging countries require immediate access to funds, I think Western Union has a viable business. The immediate transfer to banks at a lower cost can possibly take away some market share, but it is a slow degradation rather than a quick one.
Sivaram
Sivaram - 3 years ago
This is probably a low growth business, kind of like Kraft or something. You'll notice this in the income or free cash flow figures. They have basically stayed flat for the last 5 years. Yes, we had a global recession but even in 2005 to 2007, the growth wasn't that great.
jhodges72
Jhodges72 - 3 years ago
Not taking into consideration things I normally would such as finding the true owner earnings of a business by deducting one time and non-operational events from their income statement, I thought I'd present a simple summary regarding their book earnings over the last 6 years. There's no argument currently that WU isn't a good business run by able and competent management. That, thus far, is evident. However, a third important piece to solving the question of whether its a value opportunity, in my opinion, is to look at predictability. Here is what I noticed right off the bat concerning their predictability. And, even though I believe true economic value is in regards to "owner earnings", I realize that the large majority of the investment community doesn't know that information. A company's share price is not only dependent on the value proposition of that business but also how much an individual believes that business to be worth based on the available information as well as the knowledge of value he possesses. Of course, as value investors, we should be more concerned with the former rather than the later. In any event, I believe this company is highly predictable in regards to its earnings power.

Diluted Earnings Per Share

2004: $0.98

2005: $1.21

2006: $1.19

2007: $1.11

2008: $1.24

2009: $1.21

AVG. $1.16

Does anyone disagree that this seems to be a very predictable business in relations to its earnings? I agree that anything above a 16 PE is speculative. However, although I'm more of a balance sheet investor and tend not to focus on PE, I certainly don't discredit its use. I, personally, am more comfortable with a PE of 10 and under when looking for value opportunities. Of course my 10PE is based on a cyclically adjusted one and I also disinclude non operational and one time income and expenses and look for the true isolated earnings of a business. Not a one time sale of an asset that happens once every 10 years that increased the net income for that particular year for example. I haven't done that indepth of a study on this case but off hand, I'm guessing one isn't needed given that earnings rarely fluctuates over a long period of time. So, the question comes down to the earnings yield of the business because that yield is predictable. Currently trading at $17.59 per share, the cyclically adjusted earnings yield is 6.59%. I think that is what someone could probably expect as an averaged annual return on their money investing at the current price. At 6.59%, it would take 10.86 years for you to receive your invested capital back. Currently, Moody's seasoned 20 Year AAA corporate bond yield is 4.53%. Ben Graham believed that a bargain stock's earnings yield needed to be at least double the average long term AAA bond yield to qualify as attractive. According to what I've presented, WU doesn't fit that mold.

Thoughts?
jhodges72
Jhodges72 - 3 years ago
Something else important to mention regarding my above post is that the 6.59% earnings yield is pre-tax. Buffett is known to calculate "look through earnings" which is to simply account for taxes. We should also account for the $0.06 per quarter WU does pay out as an actual dividend (giving them the benefit of doubt that they'll continue to pay a $0.06 quarterly dividend). Assuming you're in the 25% tax bracket for 2010, for every $0.06 you earn, after paying your tax you keep $0.045 of the quarterly dividend WU pays out. $1.16 cyclically adjusted EPS is also taxed at the 25% tax bracket assuming you hold long term and avoid the 15% capital gains tax and also assuming long term capital gains remain at 0%. Therefore, for every $1.16 EPS you receive, at 25% taxation you keep $0.87.

$0.87 + $0.18 ($0.045 x 4) = $1.05. This is your actual investment after tax yield. At a PPS of $17.59, the individual who is taxed at the 25% level has an actual earnings yield from this investment of 5.97%.

Realizing we all have our own goals, objectives, and rules for our personal investment style, I personally look for a minimum of a 15% yield. Anything less than that - I'd just sit out and wait until a no brainer opportunity arrived. Applying that rule, WU would have to get to $7 per share to gain my interest currently. That probably won't happen and that's why I rarely find value in the large cap market. For someone who is allocating hundreds of millions or billions of capital, investing in a 6% yield makes sense. Having less than $100 Million in capital, in my opinion, it doesn't.
jhodges72
Jhodges72 - 3 years ago
This is probably a low growth business, kind of like Kraft or something. You'll notice this in the income or free cash flow figures. They have basically stayed flat for the last 5 years. Yes, we had a global recession but even in 2005 to 2007, the growth wasn't that great.

The interesting thing to me is even though they've grown their revenue from $2.86 Billion in 2004 to $5.08 Billion in 2009 (12.18% per year), the costs of doing business has also increased to the same degree which has limited their earnings from experiencing the same degree of growth but rather remaining stagnant. Therefore, it would seem that no matter if their revenue's increase, they will most likely continue producing relatively the same earnings. However, on the downside, if they have a bad year that they don't expect, their costs may not decrease and it seems to be more probable that they could experience an unexpected earnings drop because of it.

Case in point, in 2008, WU's costs of doing business represented 74.35% of their revenue. In 2009, their revenue dropped to $5.0836 Billion from $5.282 Billion in 2008. However, their costs of doing business increased to 74.77% of revenue.
jhodges72
Jhodges72 - 3 years ago
"I am not sure how comfortable my family would be with receiving money through a PayPal account."

Although that may be true in your particular situation, PayPal (an Ebay subsidiary) produces 37% of Ebay's total revenue. For the last 9-months of 2010, PayPal has generated $2.46 Billion in revenue. Western Union is a 160 year old company. PayPal is a 13 year old company and currently produces nearly 3/4ths the amount of revenue that Western Union does. A legitimate argument could be made that the majority of people who transfer money in the world are nearly as comfortable using PayPal as they are Western Union.
batbeer2
Batbeer2 premium member - 3 years ago
WOW, an avalanche...... well "Any and all questions welcome." so here goes:

The interesting thing to me is even though they've grown their revenue from $2.86 Billion in 2004 to $5.08 Billion in 2009 (12.18% per year), the costs of doing business has also increased to the same degree which has limited their earnings from experiencing the same degree of growth but rather remaining stagnant.

I would argue the cost of doing business is overstated due to rapid expansion. The expansion is not fully visible in the revenue yet. If you look at their cost, it's mainly long-term contracts with foreign banks/post offices. In 2009 they entered into new agreements even as revenue for that particular year was down.

IMO, WU is spending a lot on (future) growth. This causes GAAP earnings to understate earnings power.


For the last 9-months of 2010, PayPal has generated $2.46 Billion in revenue.

I would guess most of that revenue is between residents of the same country. USA <-> USA; SA <-> SA. Yes, it's a great business, but it doesn't compete (yet). I must say, that is just my guess over a cup of coffee. It's something I must look into to find the supporting (or disproving) facts.


Do you believe that population is growing with the recent growth in securing our borders?

It's not. There is such a thing as a legal migrant though ;-) Also, migrants go from Uganda to Tanzania and then, given half a chance, they move on to say the UK or the USA. Zimbabwe to SA is also a popular route for young men. All these poeple send home money it they can from where they are. The World bank reports the flow of remittances.

The borders close.... margin goes up. The borders open..... volume goes up.


Is there growth rate per region data for WU?

Yes, it's in the 10k. Also, the reports by the World bank will get you an idea.
jhodges72
Jhodges72 - 3 years ago
Good points - many of them I see an obvious speculative valuation flaw with. I'm curious, how do you approach the earnings yield. To be fair, it may not be something you're concerned with.
jhodges72
Jhodges72 - 3 years ago
batbeer2
Batbeer2 premium member - 3 years ago
I checked out Paypal....... https://www.paypal.com/international-money-transfer you can't select....

- Mexico

- India

- Sri Lanka

- Pakistan

- Southafrica

- .....

Compare that to this http://www.westernunion.com/WUCOMWEB/priceShopperRedirectAction.do?method=load&countryCode=US&languageCode=en&pid=US_tempOptions_price

From Wikipedia http://en.wikipedia.org/wiki/PayPal:

A PayPal account can be funded with an electronic debit from a bank account or by a credit card. The recipient of a PayPal transfer can either request a check from PayPal, establish their own PayPal deposit account or request a transfer to their bank account.

Paypal is indeed much cheaper but it doesn't currently have the relationship with banks where it matters to migrant workers.
jhodges72
Jhodges72 - 3 years ago
Are you more concerned with what county "Company A" is able to send and receive money from, or are you more concerned with the money that inflows into the business? As I've stated before, it took 160 years for one particular company to produce $5 Billion in revenue and another particular company to produce $3 Billion in revenue. For me I know where my focus would be.
jhodges72
Jhodges72 - 3 years ago
160 years for one to produce $5 Billion and *13 years for another to produce $3 Billion...
batbeer2
Batbeer2 premium member - 3 years ago
I'm curious, how do you approach the earnings yield.

I use a number of approaches and check to see if the numbers I come up with are similar.

1) The company has returned ± $ 6B to its owners in five years while growing unit volume. I add up dividends and the cost of buying back shares. A yield of ± 10%.

2) I take FCF and analyse Capex to see if it's all maintenance or there is a component of growth. This post is too short so I refer to a previous article http://www.gurufocus.com/news.php?id=99081 . In this case, I conclude Capex is high so FCF understates earnings power. I get a ± 10% yield

3) I use a "tax rule of thumb" http://www.gurufocus.com/forum/read.php?2,51334,59753#msg-59753 and get a 9 % yield.

All this takes me about 3 minutes. I do not use a calculator my math skills are unbelievable.... bad.

Most readers on this forum probably have their own approach. I leave it to the reader to reach their own estimate by any method they are comfortable with. Old School Value AKA Jae Jun is good at this stuff.

One thing I do not do is look at EPS. Nothing wrong with that, but I try to think consistently like an owner. So I look at the gross numbers and compare that to the current market cap.

Congratulations on your success with MMPIQ.
batbeer2
Batbeer2 premium member - 3 years ago
One more thing. I dedicate this article to Sivaram.

... you are more of a classic value investor--asset focus--and that's probably why you look at ROA...
jhodges72
Jhodges72 - 3 years ago
Regarding MMPIQ, thank you. In regards to maintenance, i have yet to see anyone calculate it correctly.
jhodges72
Jhodges72 - 3 years ago
I'm an asset based value investor and I can't remember the last time I looked or even cared about ROA.
batbeer2
Batbeer2 premium member - 3 years ago
LOL

I have yet to see anyone calculate it correctly.

Wouldn't that be hard to prove unless you are yourself able to ? If you are, please share. But I agree, it's impossible to calculate. The title of my old article acknowledges the fact.
rnagarajan
Rnagarajan - 3 years ago
A few years ago, I read an article regarding Indian fishermen and farmers who used cell phones to more efficiently market their crops - in the case of fisherman, they would determine market prices at various ports and determine where to dock on that basis. We've all seen the pictures of Indian farmers, most of whom are terribly poor, using cell phones as their main window to the outside world.

Western Union has a wonderful business model for today's environment and I agree that using electronic payment forms is currently not as comfortable a choice for recipients in the third world vs. going to the Western Union office. However, I have two problem's with Western Union's moat: First it is not based on the customer's love of the product or service, probably quite the opposite given what I think everyone can agree amounts to very high fees. Second, technology is only advancing and areas of India and other poor countries without a land line infrastructure are quickly modernizing with cellular networks. Yes, today's smart phone is out of reach for poor people. Will this be true in five years? Ten years?

One way or another, I don't think Western Union's business will be destroyed entirely. At worst, they will continue to experience margin pressure and could potentially lose some share. However, I don't know how to quantify the potential risks and the erosion to the business model well enough to value the shares which was the main point of my article on Combs and Western Union earlier this week.
batbeer2
Batbeer2 premium member - 3 years ago
Thanks Ravi for sharing your thoughts.

First it is not based on the customer's love of the product or service, probably quite the opposite given what I think everyone can agree amounts to very high fees.

I wonder. Any fee is of course too high in this business as far as the clients are concerned. However, I have yet to compare the fee to the altenatives. Let's say you have a bank account in India and one in the US and wish to send $ 1000 over there. What would the fee be ? Let's leave out the cost of the two accounts. I wouldn't be surprised if the fee was about $ 15 but I need to do some research.

If you want to send $ 50 you can often do so by Western Union for $ 5. That is much less !

Poeple look at the percentages and say it's a ripoff. It would make sense for WU to actually be the low-cost provider, but I need to do some research.

In short, no, I can't agree (yet) with the statement that the fees are very high.

- EDIT -

After looking into the matter I have concluded debit cards are currently the cheapest way to send money to the corners of the earth. You hand someone in a debit card in Uganda - tied to your bank account - and you can send money to that card in minutes. Phones may replace those cards but that is of no consequence to WU.

Of course, Western Union offers these cards as well; they partner with Visa et al. The fees are.... reasonable. Not the cheapest out there but by no means the most expensive option either. If you don't have a bank account..... then Western Union is your best option.

If this is a ripoff, no one is doing much about it. Sending small sums to India by wire a transfer from the US through ICICI bank is more expensive than sending it through WU...... and WU gets it to the nearest postoffice in minutes ! If you use WU to send your money home and you find yourself in another country next month.... you will also find WU there. This may not be the case with say..... ICICI.

Qouting Sivaram (below).

So they can easily become the dominant platform for money transfers through mobile phones.

Yes, that is probably the direction this is taking.

jhodges72
Jhodges72 - 3 years ago
"Old School Value aka Jae Jun is good at this stuff"

yeah, I know. that's because i'm one of the people that helped teach him back in 2007. Go ask him :)
batbeer2
Batbeer2 premium member - 3 years ago
OK, we can agree Jae Jun is a good student.
Sivaram
Sivaram - 3 years ago


JHODGES: "160 years for one to produce $5 Billion and *13 years for another to produce $3 Billion..."

Yeah but that's kind of irrelevant. What matters is the future. Could PayPal grow at the same rate (or even a bit slower) for the next few decades? Hard to say...
Sivaram
Sivaram - 3 years ago
RNAGARAJAN: "Second, technology is only advancing and areas of India and other poor countries without a land line infrastructure are quickly modernizing with cellular networks. Yes, today's smart phone is out of reach for poor people. Will this be true in five years? Ten years?"

This is a really big threat--more so than PayPal or someone like that. I have been researching Nokia and one of the things the mobile phone companies are trying to do is to develop "mobile services," such as electronic payments through phones, and the like.

I think there is still room for someone like Western Union since the moible phone companies, as well as the wireless carriers, don't have multi-national relationships. There are all sorts of regulatory issues, such as overcoming money laundering regulations, so it's not as easy as a mobile carrier hooking up with another overseas one (as would be the case with a phone call). I imagine Western Union would have more expertise in these matters. So, I can see a mobile phone service utilizing Western Union as the back-end. However, this would lead to margin declines since the carriers (or whomever the mobile phone provider) will take a cut.

Related to all this, I think the biggest threat to Western Union is probably companies like Visa and Mastercard. In some parts of the world, such as Asia, my understanding is that debit is very common while credit is almost non-existent. Visa and others have been trying to develop systems to handle debit transactions (which would be very similar to money transfers). So they can easily become the dominant platform for money transfers through mobile phones.
Sivaram
Sivaram - 3 years ago
One good thing about Western Union is that, sort of like Visa and Mastercard, they are asset-light. Equity is close to zero (negative at times) so ROE is really high. This is close to a perfect business since each incremental customer doesn't require much capital from shareholders. But the question is whether they can increase thir customers (sales). If they can, this is a great business. But the financials in the last 5 years shows that income and FCF hasn't gone anywhere. As batbeer alludes to, they may be investing for growth but soemone better be sure of that.
superguru
Superguru - 3 years ago
"This is close to a perfect business since each incremental customer doesn't require much capital from shareholders."

To think of it that is true for computer software industry as well.

What is the % of fees do WU pay to their agents?

batbeer2
Batbeer2 premium member - 3 years ago
As batbeer alludes to, they may be investing for growth but soemone better be sure of that.

Yes, that is a very important question ! One I gave some thought. Look at what is happening to current assets. Most of it can be thought of as money sitting abroad waiting to be paid out to families after migrant workers deposit some of their earnings "here". Divide the current assets by revenue to get an idea of the turnover of inventory. Inventory for WU is money out there in underdeveloped countries.

So yes, I think there is some evidence they are indeed investing for growth (I wrote expanding). Whether or not they are wise to do so remains to be seen but given the fact that they do return excess cash to shareholders it seems management is not the type that piles up assets for the sake of building an empire.
batbeer2
Batbeer2 premium member - 3 years ago
What is the % of fees do WU pay to their agents?

That of course is a closely guarded secret. However I think part of the value proposition for many agents is the fact that they get cold cash dollars upfront.
Hester1
Hester1 - 3 years ago
Good discussion!

Ravi beat me to it. I think there are long term headwinds here. It kind of seems like WU depends on their customers being poor or ignorant, as there is obviously better ways to send money. Advancement of technology and standard of living (ie. less migrant workers, replaced by equipment).

Also, I am surprised that no valuation discussion included debt (none that I saw, I kind of sped through). I think that a better valuation might be EBIT (with adjustments for non cash and depreciation/capex differences) minus normalized tax rate. EV divided by this yields a multiple of 13-14 using the last 3 years earnings annualized. Seems like your paying for a little bit of growth. Of course, if expenses are overstated as Batbeer says because of growth spending, then these figures are off. That may be what Combs sees.

jhodges72
Jhodges72 - 3 years ago
I'm with Buffett in that intetest amd taxes are very real expenses.
batbeer2
Batbeer2 premium member - 3 years ago
Hi Hester1, thanks for sharing your thoughts.

Also, I am surprised that no valuation discussion included debt (none that I saw, I kind of sped through).

You are right, you are the first to mention it on this thread. It must be said.... WU was put into bankruptcy in the nineties because it overstretched. That's now happening to MoneyGram. A look at the interest coverage and bond yields of WU causes me not to worry about the debt. No pension headache either.

It kind of seems like WU depends on their customers being poor or ignorant, as there is obviously better ways to send money.

I'll take WU to h3ll ...... the most developed country known to man with a fair number of banks and readily available mobile technology:

Sending $200 -$300, a typical sum, within the United States costs about $8 -$24 via Western Union, depending on whether the money is sent within minutes, the next day or in three bank business days. Wiring $400 will cost $20 -$28, and $500 will cost $28 -$40.

In contrast, banks usually charge a flat fee to wire money domestically. U.S. account holders with Bank of America are charged about $25 to send any amount of money within the United States (and around $35 -$45 internationally). Generally, banks take up to two days to wire money domestically.

This survey of remittance prices by The World Bank includes both banks and money transfer senders


http://www.sendmoneyhome.org/Content/money-transfer-from-USA-South%20Africa-below-3000-amount-200

http://www.costhelper.com/cost/finance/wiring-money.html

http://remittanceprices.worldbank.org/Country-Corridors

http://www.westernunion.com/WUCOMWEB/priceShopperRedirectAction.do?method=load


Advancement of technology and standard of living (ie. less migrant workers, replaced by equipment).

Less migrant workers..... that indeed would be a problem for WU.
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
I'd say in just 5 or 10 years this WU will have to go digital in a big way survive competition from a number of fronts. It will be no different than we've been seeing in banking, music, videos and other areas for years now. They will be able to cut cost by closing down the bricks and mortar locations but it will be a race against time.

Moreover, I can easily see smart phone technology spreading like wildfire throughout the third world - I'd guess at an even faster rate than the initial cell phone adoption. Smart phone apps are often just entertainment applications in the western world but in the third world smart phone's will be seen as a an opportunity to create apps that really make a difference in standards of living and may even aid in simple survival (medical diagnostics, food distribution, improved bartering, micro loan management, etc.)

I'd picked up shares in Points International (a modern day Blue Chip Stamps of sorts) and I can even see it's online business model coming under threat from the new phone chips being developed to handle multiple currencies including points and other reward systems. So, in my view if PTS's business model is at risk then the old world WU is certainly at risk.
batbeer2
Batbeer2 premium member - 3 years ago
Hi AlbertSunwapta

I see your point, and many smart poeple agree. Probably because I'm not, I can't. It just doesn't compute.

If WU is under threat from low cost digitised solutions, then converesly you would expect WU to be expensive because of all the bricks they own..... yes ? WU numbers would be more like SHLD than EBAY.

Well..... WU simply doesn't have a lot of fixed assets. You want to take on WU....... high asset turnover won't get you there. Amazon isn't better than a brick-and-mortar store simply because Amazon is "Internet based". Amazon is better because it has higher asset turnover. No bricks and much less inventory for the revenue generated.

The bear case for WU, in financial terms, means WU can be beaten at asset turnover..... to me, that seems unlikley. You look at the numbers and its clear that asset turnover is not the achilles heel of WU.

I faced this enigma when I first looked at WU. The only explanation I have is that WU isn't what it is because it owns an office where others don't. WU is what it is because banks and government regulations create the barriers to entry.

Let's say YOU want to compete with WU. You pay ICICI 150 to transfer 10 000 to India. You then start distributing cash in 100 portions for a fee of 5. Tempting no ? Not a bad ROI if you do this once a week.

What happens next ?

WU has solved these problems. Digital cash doesn't. You pay ICICI 150 to transfer 10 k and distribute "cash" locally with the latest smartphone and you will run into the exact same problem you ran into when you were doing it with real cash.

The achilles heel of WU is deregulation. What happened in Europe with the EU.... that's a problem. In fact that did wipe out WU type businesses within the EU overnight.

- Turkey joins the EU and WU revenue drops... that computes.

- Mexico and the US create a common currency..... WU shareholders should worry.

Smartphones...... no that does not solve anything for a potential competitor.

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