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Barel Karsan
Barel Karsan

Does Western Union Have Moat?

February 10, 2012 | About:

Western Union's (NYSE:WU) P/E fell below 10 the other day as a weaker than expected outlook resulted in a share price fall of almost 10%. The stock now trades some 30% lower than it did in 2008 even though the company's profits are higher now than they were then as the company has clearly benefited from having a moat.

Western Union gets the vast majority of its revenues (and profits) from consumer to consumer money transfers. For example, an immigrant in the US will go to one of Western Union's 485,000 dealers with cash and send money to family in Mexico, where it can be picked up in a different currency from another Western Union dealer within minutes. Western Union has by far the widest dealer network and largest profits in this industry, giving it distribution and marketing scale that appears to have provided it with a competitive advantage.

As a result, consider the moat-like ROA and margins Western Union has enjoyed:


If Western Union's moat were to continue as is, it may make for a very profitable investment at a P/E under 10. However, could this moat be under attack? There may be a few ways in which Western Union's advantage may be eroded.

First, while Western Union does enjoy global economies of scale, other companies can take advantage of individual corridors without requiring global scale. For example, a company with distribution in the US and Mexico or India or China, for example, could become a regional competitor, matching Western Union in scale where it counts, on the most important money-transfer routes.

Second, while there are no larger competitors currently, there are larger potential competitors. Credit-card processing companies have worldwide distribution and could conceivably create competing products, while international banks could partner to offer competing services.

Third, potential disruption could occur through internet-based solutions. The growth of mobile communications is allowing developing countries to accept payment by mobile phone, whereas internet-based services like Paypal already enjoy significant mind-share in the developed world. As cash use declines and consumers migrate toward such solutions, Western Union's margins could erode further.

Finally, consider the extent to which these factors may already be playing a role. The charts above show that margins and ROIC have been declining of late. Further investigation also reveals that Western Union has recently reduced prices in some segments. A lack of pricing power suggests a moat may not be too strong. (Though in fairness, the price decreases could be the result of Western Union defending its moat from would-be entrants, which would lead to a stronger moat in the future.)

If Western Union's moat erodes, it could find itself in great difficulty. It has a ton of debt relative to equity, which it will be hard-pressed to pay off if Internet competitors erode margins quickly. If the moat stays how it is, however, the company will continue to throw off a ton of cash, using that money to buy back shares.

Whether you invest in Western Union, therefore, depends on whether it's in your circle of competence. If it is, you can determine whether their moat can be defended, or whether there is a strong chance that it may soon be eroded.

Disclosure: No position

About the author:

Barel Karsan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.4/5 (17 votes)


Davidchulak premium member - 5 years ago
If you have any faith in Morningstar, they believe WU has a wide moat. I think you touched on some great points.

Competition will come from other sources as you mentioned, especially the internet, credit card companies and even banks may jump in. I can deposit a check by scanning it with my phone, so the technology for replacement of sending money this way, may be changing sooner than we think.. It's too early to tell, but the moat, in my estimation, is not as big as some state and is already under attack.


It has been pointed out that a lot of their revenue comes from immigrants that send checks abroad. Unless employment opportunites get much better, it may continue to drag on their bottom line.
Batbeer2 premium member - 5 years ago
WU deals in small sums of money ($ 10 - $ 150) Banks, credit card companies etc. can't do it at WU's prices.

Send 50 000 to Pakistan and you're a fool to use WU.

Send 1000 x 50 and you'd be a fool not to.

Phones etc. will put manufacturers of wallets out of business (think COH). These innovations are not a means to exchange small amounts of foreign currency at low rates. Wallets are no substitute for foreign exchange corridors and digital wallets are just that... wallets.

Also, you would not believe the systems/certifications/controls you need to have in place before the US government allows you to transfer meaningful amounts of money to say.... Sudan. WU has these in place. You can't just wake up one day and start competing. The FBI would be at your door in days.

I'm quite comfortable with the business. I'm not 100% comfortable with the CEO, Hikmet Ersek. He seems very capable but I'm not sure he works for the owner.

Just random thoughts.
AlbertaSunwapta - 5 years ago    Report SPAM
WU's mkt cap of about 12 billion. Apple's alone with cash of about $100 billon. Smart phone's proliferating around the world. Gee, I wonder if Internet solutions are a threat. I'd say that that those that could tske WU's market away overnight see the market as too small to bother with. Moreover, I'd guess that - right now - WU is working on some smart phone app to maintain it's franchise and cut its brick and mortar costs.
Praveen Chawla
Praveen Chawla premium member - 5 years ago
The stock has been trading in the 16 - 20 range for over 3 years now. Quite frustrating - even though its generating a billion dollars in free cash. The company has been buying back stock rapidly (share count has dropped by 150 million since the IPO). They have raised the dividend as well. So they are trying to reward shareholders but Mr. Market is not cooperating. I'd say Mr. Market does not believe this company has a bright future.

Brodsky - 5 years ago    Report SPAM
I like WU!
Charteroak_2000 premium member - 5 years ago

Just tanked today - scooped up a bunch... We shall see ...

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