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Western Union - A Compelling Investment

November 07, 2012 | About:
Introduction

Western Union (WU) is the largest money transfer company in the world. They are 5 times larger than their next competitor which is Moneygram (MGI). They have been operating since 1851, and been through many radical market innovations which they have to reinvent themselves in order to stay relevant. They used to be the largest telegraphy service company in the world last time, and had evolved totally into the money transfer business as the previous business had gone obsolete.

Competitive Advantage

A business with terrific economics comparable to See's Candy! They earned extremely high FCFs, due to the fact that they need only little for reinvestment while their business model allows them to constantly scale up. Average capex is only about 11% of operating cash flow, and despite their high payout ratio of almost 85% (shares repurchase & dividend), they can constantly grow their business and spend on acquisition.

The only ones that can compete with them are the big banks who are going into the money transfer business they are in. For example, wells fargo recently announced they are going into it also. However, the competitive advantage of Western Union is such that they provide money transfer service to the unbanked, underserved customers, esp in the emerging markets.

Not all customers have access to banking facilities, the way that many of us do. Hence, they have to rely on money transfer companies like Western Union for their remittance. Even the big banks now are partnering with Western Union, as their massive operation, economies of scale and reach do not make sense for the bank to come up with a service on their own.

Income Statement


20112010200920082007
Rev54915193508452824900
Adj. OI14321360135413551322
Op Margin26.1%26.2%26.6%25.7%27.0%
Adj. NI1145.9957.2922.5909.3847.3
EPS $1.81 $1.43 $1.32 $1.23 $1.10
Net Margin20.9%18.4%18.1%17.2%17.3%


Taking a look at their past 5 years earnings, they have a slight decrease in operating margin from 27% to 26.1%. Even with this decrease, they managed to earn a respectable net margin of 20.9% in 2011, compared to a margin of 17.3% in 2007. Lets take a look further at their key indicators below:

20112010200920082007
C2C225.8213.7196.1188.1167.7
Growth34.6%
Business425404.9414.8412.1404.5
Growth5.1%


Their transaction volume has increased 34.6% over the last 5 years for C2C, and 5.1% for business segment. Even though they did this by reducing fees, they still managed to maintain their margins and profitability. They only way they can do so is by driving down their own operating costs.

Competitor analysis


CompetitorRevenueOINIOp MarginNet Margin
1Western Union54911432114626.1%20.9%
2Moneygram12481435911.4%4.8%


Take a look at the comparison of Moneygram, their closest competitor to Western Union. They are simply being crushed by Western Union as they cannot afford to fight the price war being the much smaller player.

An obvious metric to use would be their margins. WU has more than twice the operating margin of MGI, even though they are in the same busness, which shows their cost is substantilly lower.

Net margin is almost 4 times that of MGI, showing their leverage on their economies of scale.



Valuation


Projecting Investment Return
1Dividend0.5
Yield4.18%
Shares Repurchase (end 2013)750
Yield10.39%
Total Yield14.57%
2Operating CF1129
Capex125.1
FCFs1004
FCFs Yield13.9%
Capex/OCF11.1%


Current management projection for 2012 EPS is $1.65, which translate to a p/e of only 7.24.

The lowest p/e they ever trade was during the subprime crisis which is at 7.93, still higher that the projected.

Average p/e over the years is about 15 at least.

Dividend yield is at 4.18% after the increase, and the dividend payout ratio is only at 30%.

Share repurchase of 10.39% outstanding shares till end of 2013, which will boost EPS by almost 11.1%.

Total yield calculated as per above would be at least 14.57%

If FCFs method is used, their yield would be about 13.9%.

We would expect them to at least trade at the pe of 15, which represents an upside of more than 100% to current share price. Competitors are trading at average of 15 - 22 p/e.

Shareholder Value

20112010200920082007
Repurchase8045814001315727
Total3827
Dividend0.310.250.060.040.04
Abs.196167423031
Div Payout16.8%18.4%5.0%3.2%3.6%
Total Payout10007494421344758
ratio85.8%82.3%52.1%146.3%88.4%


As the need for capital reinvestment is little compared to the tremendous cashflow they earning, management can constantly create shareholder value by repurchasing shares and increasing dividend payout.

Take a look at the table on shareholder value, in the past 5 years, they have repurchased a total of 3.8 billion worth of shares!

Payout ratio is on average 85%, and even with such high payout, they can constantly grow their business and spend on acquisition.

With the recent drastic drop in share price, we believe Western Union is a compelling buy for the long run. We have a market leader with a See's Candy like business economics, shareholder friendly management, and plenty of growth opportunities in the emerging markets.

What more does investor wants?

(valueground.blogspot.com)

About the author:

Valueground
We are a 2 partners team managing a concentrated portfolio, with the intention to hold our investments for as long as the fundamentals stay intact. We do not chase, nor wish to participate in the short-term race for returns, choosing instead for the best opportunities to invest in. The time we do so is the time we invest big, taking outsized stakes in what we call the “misguided & misunderstood” investments. Contrary to many, we subscribe to the notion of low risk, high return.

Visit Valueground's Website


Rating: 3.6/5 (19 votes)

Comments

tonyg34
Tonyg34 - 1 year ago
the comparison to sees candy is particularly inapt

as one company increases prices annually
BEL-AIR
BEL-AIR - 1 year ago
I am afraid that WU has not been able to grow their assets despite being around since the 1800's...

Book value is negative.

I use paypal all the time, I can send money for free, to another person who has a paypal account, fast and easy to use and to setup. Compare this to WU fee's...

Here is paypal fee's

https://cms.paypal.com/ca/cgi-bin/marketingweb?cmd=_render-content&content_ID=marketing_ca/fees

Here is western union fees

https://wumt.westernunion.com/WUCOMWEB/priceShopperRedirectAction.do?method=load&countryCode=US&languageCode=en&pid=usMenuPriceShopper

You do the math...

So many ways to send money for low cost or free, plus faster and more handy compared to going to a brick and mortar place...

I ask you all this, when is the last time you use WU?

How about paypal?

I simply cannot predict were wu will be in 5 years, with all the money apps for smart phones etc, I am afraid new technology and smart phones might eventual be to much for the brick and mortar wu...

People you have to get this thru your heads, very very seldom will you be able to buy a great business undervalued with nothing wrong with it as we are about to making new highs in the general market...

It is just how the markets work. 85% of the time you will get value traps by trying to do so, just like WU just might be.

valueground
Valueground - 1 year ago
Hi Tonyg34,

We are just comparing to See's Candy in terms of their business nature, such that they generate a lot of FCFs, while requiring minimum reinvestment.

Unfortunately, Western Union is in a "commodity" like business, where they do not have any pricing power unlike See's Candy. But they have the economies of scale to drive down cost, thereby their ability to be the lowest cost producer. This also explain the reason why their margins are holding up well even though they made pricing reductions through the years.

valueground
Valueground - 1 year ago
Hi BEL-AIR,

They have not been able to grow their assets, because they are in a completely different business than they were in the past. You can read up more on their history on wiki.

In our opinion, using book value would be flawed in this case. They are an asset like company, and basically a service provider. Such companies rely on the tremendous goodwill and intangible assets they have build up over the years.

Book value is negative also due to the tremendous share repurchase in the past 5 years. Negative BV here does not mean anything.

We are aware of paypal and the existence of other money transfer methods which are undercutting into Western Union business model. However, we believe it would only have a minimal impact on them.

Their competitive advantage lies in serving the unbanked customers. These are people without access to banking facilities, needless to say the internet, or knows about paypal. These are people in the emerging economies, which still relies very much on traditional channels like Western Union. And this part of the world represents a huge proportion of WU customers, and it constantly growing, in need of their services.

Hence, whatever customers they are going to lose to paypal or others, WU can easily replace and grow further these group of their core customers.

Talking about value trap, in fact, we do not even need WU to grow with their 1+ bil of FCFs generated annually. Our stake would be enlarged by 11.11% by the end of next yr.

Thanks for your comment.

BEL-AIR
BEL-AIR - 1 year ago
Have you ever been to a third world country or in Asia recently?

Every one has a smart phone and a data plan or pay as you go data plan...

With apps growing.... WU is at risk due to the internet and someone under cutting them with a cheap app or cheap fee's, very likely...

In fact if you read risks in their reports, WU management says that is one of their risk factors that technology could hurt their cash flows and undercutting them. I am not only saying this, they are saying this as a likely risk...

That is what they are in a panic trying to develop new technologies perhaps apps etc, if they will make it time will tell.

Thank you for your article.

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