An earlier PayPal article assumed quickly and disregarded Western Union (WU, Financial), a $10 billion money transfer agent, for its lack of revenue growth.
(Read PayPal article: PayPal Breaks Through)
(Western Union, annual filing)
On Aug. 3, Western Union delivered its second quarter results. The financial services company lost 1.15% in quarterly sales to $2.67 billion and 0.48% to $391 million six months into 2016. Western Union closed up 3.87% the following day while the broader market, Standard & Poor's 500, closed 0.02%.
“We delivered another solid quarter, led by strong growth from our digital business.
"While international markets are mixed, our U.S. money transfer business continued to provide steady performance, helping drive good profitability and cash flow.
"Strategically, we continue to make good progress. We released upgraded mobile apps for westernunion.com in eight markets and expanded our account payout capabilities to be able to reach billions of accounts in more than 50 countries. We also activated thousands of business customers on our new WU EDGE digital platform, and continued to invest in enhancing our technology infrastructure and compliance programs across the company." –Â Western Union President and Chief Executive Officer Hikmet Ersek
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Outlook for fiscal 2016
Western Union expects low to mid-single digit constant currency sales increase with earnings per share between $1.60 to $1.70, up approximately 1.85% compared to fiscal 2015.
Market performance
In the past five years, Western Union lagged the broader index with 5.6% total return while the latter gave 14% (1). Year to date, however, Western Union outperformed the broader market with 14.4% return contrary to S&P 500’s 6.6%. Last year, Western Union delivered 3.17% annualized gain.
Valuations
Western Union had 12 times (industry median: 17) for its trailing 12 month price-earnings (P/E) multiple, price-book (P/B) value multiple of 7.4 times (industry median: 1.3) and 1.86 times (industry median: 3.5) price-sales (P/S) multiple (2). The company also had a 3.18% trailing 12-month dividend yield and 4.2% buyback yield.
(Western Union, annual filing)
Western Union
Western Union is a leader in global money movement and payment services. The company provides people and businesses with fast, reliable and convenient ways to send money and make payments around the world.
Western Union traces its origins back 165 years as a telegraph (communications) company. Western Union, after losing a patent lawsuit to Bell Telephone Company in 1879, began its money transfer service. In 1884, the company was also one of the original 11 all-Americans listed in the Dow Jones Transportation Average stock market index.
In the early 1980s, Western Union began transitioning itself from the lesser profitable telecommunications business and began performing money transfer service internationally. In 1987, Western Union underwent a Chapter 11 process that was led by investor Bennett S. LeBow. Robert J. Amman was assigned to be Western Union’s president and CEO. Western Union ran two business segments: nonstrategic communications, such as long-distance analog voice network, and money transfer business.
In 1991, Western Union changed its name to New Valley Corporation. Investor Carl Icahn (Trades, Portfolio) came into the picture, too, as he became a large bond holder during this period. In 1994, New Valley sold itself for $1.2 billion to First Financial Management (later acquired by First Data Corporation).
In 2006, First Data spun off Western Union. In the same year, Western Union discontinued its telegram and commercial messaging services (3).
Western Union engaged in several acquisitions: Custom House for $370 million in 2009; in 2011, Angelo Costa for $200 million, Travelex's Global Business Payments division for 606 million pounds ($740.35 million) and Finint S.r.l., one of Western Union’s leading money transfer network agents in Europe.
The company defined its Western Union® brand as globally recognized and representing speed, reliability, trust and convenience.
As of Dec. 31, 2015, Western Union’s services were available through a global network of more than 500,000 agent locations in more than 200 countries and territories, with approximately 90% of those locations outside the U.S.
Western Union has three business segments: Consumer-to-Consumer (79% of total fiscal 2015 sales), Consumer-to-Business (12%), Business Solutions (7%) and Other (2%).
Consumer-to-Consumer (C2C) segment
This segment represents Western Union’s core business. The segment exists secondary to services provided to individuals using Western Union’s services to perform money transfers from one consumer to another. The segment also includes services through the online website westernunion.com.
Western Union earns revenue from transaction fees charged to consumers to transfer money. Also, Western Union generates business based on the difference between the exchange rate set by the company to the consumer and the rate at which the company’s agents are able to acquire the currency.
The company then pays its agents a commission based on a percentage of revenue. For most Western Union agents, the costs of providing the physical infrastructure and staff are typically covered by the agent's primary business (such as found in a banking and postal services store).
Under the C2C segment, consumer can send money by either a walk-in (to any Western Union agent) or online transaction, including website or mobile app (4).
Western Union allows several funding sources for money transfers, such as cash and credit/debit cards. The company also allows several ways for a recipient to obtain the transferred money, such as through a money order or check or provide payout through an ATM, mobile wallet and bank account.
According to the company, the majority of the transfers occurring in the segment were cross-border transactions.
In fiscal year 2015, the C2C segment lost 5.9% year on year to $3.22 billion and delivered a 32.4% operating margin (highest among the segments).
In the first half of this year, the segment lost 1.2% to $2.11 billion and had a 22.1% operating margin.
Consumer-to-Business (C2B) segment
Western Union provides fast and convenient options to make one-time or recurring payments from consumers to businesses and other organizations, including utilities, auto finance companies, mortgage servicers, financial service providers, government agencies and other businesses.
The transaction fees generated in the C2B segment are typically less than the fees charged in the C2C segment.
Consumers may make a cash payment at an agent or company-owned location or may make an electronic payment on the Internet or over the phone using their credit or debit cards or through an automated clearing house.
Western Union derived most of its C2B business from the U.S., followed by Argentina.
In fiscal year 2015, C2B delivered 6.5% growth year on year to $637.7 million and had a 10.8% operating margin.
In the first half of this year, the segment lost 1.7% from the same period last year, accompanied by a 13.1% margin.
Business Solutions segment
This segment facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium-sized enterprises and other organizations and individuals.
Western Union derives most of its sales in this segment from foreign exchange revenues (5). Further, customers may make an electronic or wire transfer or remit a check in order to initiate a transaction.
A majority of the Business Solutions business was generated outside the U.S.
Business Solutions lost 1.5% year-on-year growth in fiscal 2015 to $398.7 million and had a 0.7% margin. In the first half of this year, the segment grew 2.2% to $200 million with a 3.7% margin.
Other Business segment
This segment contains Western Union’s money order services, including costs for the review and closing of the company’s acquisitions. Western Union derives investment income from interest generated on its money order settlement assets, which mostly occur in the U.S.
Cash, debt and book value
Western Union had $2.46 billion in total cash (6). The company had $3.23 billion in debt with a debt-equity ratio of 2.46. Western Union also had $3.86 billion, or 41% of its total assets, in goodwill and intangibles and having a book value of $1.31 billion.
Cash flow
(Western Union Cash Flow, quarterly filing)
In the first half of the year, Western Union’s cash flow from operations grew 4.27% to $485.6 million compared to the same period last year. The company spent $108.7 million in capital expenditures leaving it with $376.9 million in free cash flow.
Western Union paid 130% of its free cash flow, or $491 million, in dividends and buybacks.
In the past three years, Western Union allocated an average of 90% of its free cash flow in shareholder dividends and buybacks with 102% allocation in fiscal 2015. The company also had paid, on average, $500 million per fiscal year (2014 and 2015) for debt reduction.
Conclusion
Western Union demonstrated resiliency over the history of its existence. The company did not survive the heightened capital requirements of its once telecommunications business and rather had focused on telegrams and later on just money transfer services.
The money transfer services, meanwhile, had been evolving and had been more competitive brought by the existence of PayPal (PYPL, Financial) at the end of the 20th century.
As a leader in the global money movement and payment services, I would have expected Western Union to be an active acquirer of up and coming financial technology (fintech) businesses. The company’s $3 billion to $3.6 billion cash position in fiscal 2015 could have been used to acquire Xoom (XOOM, Financial), for which PayPal paid $1.1 billion, to further enhance its reach in online money transfers and remittances.
Western Union, nonetheless, delivered high growth figures for its westernunion.com services. In fiscal  2015, transactions in the website grew by 26%. In the first half of the year, website transactions grew 25% year on year while delivering 20% year on year, in constant currency, sales growth. These figures were almost as similar to PayPal’s top line nine-month growth.
(Read PayPal article: "PayPal Breaks Through")
The only burden I see here is that Western Union carries a lot of debt and as a result, the book value multiple is surging high. Western Union, nonetheless, delivered good profitability in recent years mid-teen profit margin, about 100 to 200 basis points higher than PayPal's.
(Western Union shares, Google Finance)
Using five-year historical earnings multiples with its projected fiscal year per-share earnings, I arrived at a value of $18 a share. Meanwhile, Barclays analysts downgraded Western Union shares from Equal Weight to Underweight with a target price of $20 a share on July. So far, this seemed to be amazingly accurate as shown in the image above.
Regardless, Western Union is a HOLD.
Notes
(1) Morningstar data.
(2) GuruFocus data.
(3) Wikipedia: This ended the era of telegrams that began in 1851 with the founding of the New York and Mississippi Valley Printing Telegraph Company, and which spanned 155 years of continuous service.
Western Union reported that telegrams sent had fallen to a total of 20,000 a year, because of competition from other communication services such as email. Employees were informed of the decision in mid-January.
(4) Annual filing: Online transactions, as of Dec. 31, 2015, were available via Western Union brand websites in 34 countries. Additionally, in certain countries, consumers can initiate a Western Union money transfer through their bank’s online banking services.
(5) Annual filing: Foreign exchange revenues are based on the difference between the exchange rate set by us to the customer and the rate at which we are able to acquire the currency.
(6) GuruFocus data.
Disclosure: I do not have shares in either Western Union or PayPal.
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