WU - Western Union

[bargainman]

Down 27% today.  Morningstar had their fair value at $29 before the drop.  Currently trading at $13.  Anyone following this stock?  Seems like a recurring revenue play with some size advantages.

[mysticdrew]

Down 27% today.  Morningstar had their fair value at $29 before the drop.  Currently trading at $13.  Anyone following this stock?  Seems like a recurring revenue play with some size advantages.

 

Definitely looks tempting after the huge drop.  Earnings still guided to a $1.5 range for 2013 and 1.7 for 2014.  Share repurchase increased and dividend increased.  My main concern of course is how relevant is their business model these days with more and more ways to move money around?

[JEast]

I would be somewhat skeptical of WU.  I have been in the short camp as global phone transfers are surely going to eat into their domain at some point.  Even the big banks are starting to allow transfers via phone or email.  In southeast Asia, you can pay your local 7-Eleven with a phone transfer, and probably elsewhere too.  Anyway, this was my counter argument with the Morningstar folks a few years ago at a conference.  They like WU for their 'moat' and my conclusion was they were losing their moat.  Time will tell.

 

 

Cheers

JEast

[oddballstocks]

Morningstar has loved this stock since the spin-off.  I remember at one point fair value was $34 according to them.  I think they've slowly revised fair-value downwards as the stock has moved down.

 

I remember the original thesis on this one from them, maybe back in 2006 or 2007.  It was a wide-moat stock that was a spin-off, almost a sure way to profit.  The company would benefit from the immigration boom taking place (legal or illegal, it went unstated).

 

I never purchased because I couldn't ever get over the impression that Western Union was something outdated.  I associated the name with telegrams and the wild west, and an old tattered sign hanging above the counter at dodgy convenient stores.

 

So here we are, the immigration boom is over, the internet has made transfers easy, so where does WU fit in?  Really they provided a product for immigrants who were unbanked, and wanted to send cash back home.  The brand was also tainted by Craigslist and internet scams.  I believe it's still true if you go to Craigslist there's a big warning saying don't do business with people who want to Western Union the money, or want a money order.  So people who have zero familiarity with the brand now see this and associate the product with internet scams.

 

I've followed this one with fascination, and will continue to do so.  This might be a great example of a divesture that was really a junk division.

[AZ_Value]

Morningstar has loved this stock since the spin-off.  I remember at one point fair value was $34 according to them.  I think they've slowly revised fair-value downwards as the stock has moved down.

 

I remember the original thesis on this one from them, maybe back in 2006 or 2007.  It was a wide-moat stock that was a spin-off, almost a sure way to profit.  The company would benefit from the immigration boom taking place (legal or illegal, it went unstated).

 

I never purchased because I couldn't ever get over the impression that Western Union was something outdated.  I associated the name with telegrams and the wild west, and an old tattered sign hanging above the counter at dodgy convenient stores.

 

So here we are, the immigration boom is over, the internet has made transfers easy, so where does WU fit in?  Really they provided a product for immigrants who were unbanked, and wanted to send cash back home.  The brand was also tainted by Craigslist and internet scams.  I believe it's still true if you go to Craigslist there's a big warning saying don't do business with people who want to Western Union the money, or want a money order.  So people who have zero familiarity with the brand now see this and associate the product with internet scams.

 

I've followed this one with fascination, and will continue to do so.  This might be a great example of a divesture that was really a junk division.

 

I have also looked at WU sporadically (never owned though) for a little while and I'm not sure it's been that bad. I've kept an eye on it mostly due to the reasons mentioned above as I am curious to see how the market treats a business that is faced with a significant business/existential threat, in this case is it increasingly obsolete?

 

However if you look at how the business itself has performed it hasn't been bad at all to be frank and like bargainman said dividends have been increasing constantly and they've bought back shares. Plus their business model just delivers huge returns on their capital - I'm attaching a Value Line page for WU if anyone wants to take a quick glance at WU's numbers

 

Revenue growth is just starting to slow down and their story will depend on whether or not they're able to continue growing their electronic business to adjust to the changing environment. But there has to be a point where if the stock drops low enough just like any business you have to look closely at this.

It'll sure be interesting to follow.

 

WU-VL.pdf

[premfan]

Thanks for the link AZ value!  This seems a bit interesting. I would have to do some investigative work before i have an opinion on it. 

[Guest rimm_never_sleeps]

this company needs to go private and milk the cash. it's a declining business and current management has done nothing over the years except take money out of it.

[ItsAValueTrap]

This might actually be a business with high barriers to entry.  ?  Two main hurdles are:

1- Fraud.

2- Regulation.  The cost of complying with regulations is high.  (But anybody can jump through the hoops and there is little value-add here.)

 

From Western Union's 10-K:

Our exposure to receivables from our agents, consumers and businesses could impact us. For more information on this risk, see risk factor, “We face credit, liquidity and fraud risks from our agents, consumers and businesses that could adversely affect our business, financial condition and results of operations.”

 

The fraud problem is really hard to solve.  It has killed off nearly all of Paypal's competitors.  Western Union's own Bidpay died.  Ebay's attempt at duplicating Paypal was dropped when it decided to buy Paypal.  Knowing how to deal with fraud is something that is incredibly hard for other companies to duplicate.

 

2- I think that fraud is a huge barrier that provides a moat to companies like Visa, Mastercard, and Paypal.  Offering your service online is probably the easy part.  Not getting killed by fraud is the hard part.

[abcd]

Todd Combs used to be bullish in 2010

 

http://seekingalpha.com/article/232902-why-is-todd-combs-bullish-on-western-union

 

[Shane]

Does anyone know how to get a copy of Todd's letter where he mentions Western Union?

[tengen]

There's a third barrier to entry: the cost of setting up banking relationships in all the countries you wish to do business in. This isn't as easy as people might think.

 

Disclaimer: it's been several years since I was loosely involved in the payments industry.

 

[ItsAValueTrap]

Does anybody know why Western Union is lowering its fees?

 

What threats do they face to their various businesses?

[ItsAValueTrap]

Reading through their investor presentation right now:

http://seekingalpha.com/article/583861-the-western-union-s-ceo-hosts-2012-investors-day-transcript?part=single

 

Some useful information in there:

Implementation and operation of the new disclosure requirements under Dodd-Frank is really complex. And although there are going to be some costs for -- to implement that, we view as a competitive advantage. We have the technology and resources available to meet the installation needs across our agents that are based in the U.S., while others may don't have the resources and the technology. To protect our customers, our brand, to comply with rules and regulations, globally we dedicate about 600 employees around the globe to these efforts, and we spend yearly about $60 million on anti-money laundering and regulatory environment.

[twacowfca]

Does anybody know why Western Union is lowering its fees?

 

What threats do they face to their various businesses?

 

It's called competition.  This is not the first time they have lowered their fees.  It really is a value trap, especially with a lot of debt.  :(

[ItsAValueTrap]

Warren is somewhat obsessed with companies that can raise their prices on their customers.  e.g. if Moody's raised its prices, Berkshire would still pay the higher price for bond ratings.

 

If Western Union is lowering its prices due to its competition then maybe its moat/advantage is not that big at all.

[Guest hellsten]

Immigration might not be such a big issue for Western Union (source http://www.maximumpessimism.com/newsletters/2012-07.pdf):

With construction pacing 21.5% higher than a year ago in the residential space, we believe the trend in both multi-family housing

such as apartment buildings (currently booming thanks to rental demand)  and the burgeoning trend in

single-family units bodes well for the company in the years to come.  Based on estimates by the Census

Bureau, the United States is expected to achieve net immigration of between 1.2 and 1.6 million people

per year by the year 2017, which compares to 1.3 million between 2005 and 2007.  One significant driver

to the desirability of coming to the United States rests upon available jobs, and data shows that net

migration fell precipitously during the housing bust.  Given that Western Union operates in 200 countries

with 500,000 agents, we believe it is well-poised to capitalize on any migration trend, and a recovery in

construction (and other home related services) is helpful to the overall picture

 

Trading at what we believe to be a reasonably depressed P/E of 9.1x, Western Union shares are currently

trading at an approximate 30% discount to their long-term average P/E.  Moreover, we believe the shares

represent a much larger discount to their intrinsic value measured through discounted cash flows.

 

Shares have fallen further since the article was published and forward P/E is now 7 according to Morningstar.

 

I like the fact that value investors have been and are interested in Western Union (Todd Combs, Berkshire, Chieftain Capital/John Shapiro). I don't like that Berkshire sold their position, but Buffett has himself said that they make mistakes when selling.

 

Chieftain Capital have 12.66% of their portfolio in WU and have been buying more:

http://www.sec.gov/Archives/edgar/data/1491126/000117266112001177/chieftain3q12.txt

 

Chieftain Capital runs a concentrated portfolio with just 11 stocks.

 

Murrah Stahl wrote about Western Union in 1997:

 

On this day twenty years ago, it would have been possible to write a purchase recommendation on Western Union and conclude that this equity was quite undervalued. Of course, Western Union ultimately filed for bankruptcy. Western Union traded at an enterprise value to EBITDA ratio of approximately 2.85x, which is an interesting coincidence since the current Contrarian highlights BCE at exactly the same EBITDA ratio. Western Union traded at roughly 50% of book value and there was more than $2 of equity for every $1 of debt.

 

Western Union’s functional problem was its inability to earn a return on its embedded capital in its basic telegram business. If it had looked to Federal Express instead of telephony, another possibility would have presented itself. Federal Express was expanding its network and it needed offices and vehicles in every city in the U. S. Western Union had these resources. These resources were useless in long distance telephone. They would have had enormous value to Federal Express. Assets which ultimately earned no return would have earned 25% plus as part of Federal Express. Thus, the paradox is that Western Union believed it had obsolete assets when in reality this was not necessarily true. If the management of Western Union had thought that its business was to transport messages instead of to transmit messages, history may easily have had a different course.

 

Source http://www.scribd.com/doc/33821202/Third-Edition-Volume-1

 

WU seems like a pretty good bargain currently, but who would want to own a telegraph company ;D

 

Will the behavior of the people that use Western Union change and will margins go down? I don't know, but I find it hard to imagine e.g. construction workers using PayPal and their credit card to transfer money to their relatives who then would have to transfer it from PayPal to their local bank, if they have a credit card and bank account.

[siddharth18]

What about their management? Wasn't the Travelex acquisition value destroying?

[sethatk]

My wife used WU for a time to send money to her family, but has been using a service offered at Walmart, because it is cheaper. I believe it is called Money Gram.

[Green King]

Do you mind sharing what country do your wife's family live in ?

[Guest hellsten]

This article provides a good overview of Western Union's moat:

http://www.theglobeandmail.com/globe-investor/investment-ideas/western-unions-fantastic-economic-moat/article5407182/

 

- over the past five years the company has actually increased its market share from 15 per cent to 18 per cent.

- Its next closest competitor – MoneyGram – sits at about 6 per cent.

- The nature of its moat is threefold: a strong globally recognized brand, network effects and economies of scale.

- Western Union’s global network is nearly 80 per cent larger than its next largest competitor.

 

twacowfca, do you believe WU is a value trap and if so why?

 

siddharth18, I haven't looked at management yet, so I don't have an opinion on management.

[ExpectedValue]

WU is a value trap. The moat is not that great bc MoneyGram is cutting prices which is eating into WU's business. It's an oligopolistic market but when your competitor just cuts prices and you have to follow suit, it is not good

[Guest hellsten]

WU is a value trap. The moat is not that great bc MoneyGram is cutting proces which is eating into WU's business. It's an oligopolistic market but when your competitor just cuts prices and you have to follow suit, it is not good

 

WU could be a value trap. I don't know. What I know is that WU has a great brand, and a local presence in over 200 countries. Their network continues to expand.

 

Bruce Greenwald has this to say about moats:

Greenwald indentifies four areas of advantage.

1. Economies of scale (high fixed costs, network effects)

2. Customer captivity (habit, switching costs, search costs)

3. Cost advantages (proprietary technology, being ahead on the learning curve, access to resources)

4. Government protection (licenses, patents)

http://gregspeicher.com/?p=1398

 

1, 2, 3 and 4 all apply to WU to different degrees.

 

Bruce Greenwald also says:

There are only a few types of competitive advantage (demand, supply, and economies of scale) and two straightforward tests (market-share stability and high return on capital) to confirm their existence.

http://www.valueinvestingworld.com/2013/01/competitive-advantages.html

 

The ValueLine report shared earlier shows WU has fairly stable and high return on capital, the same can be said for their net profit margin. Market share seems to be climbing.

 

Bruce Greenwald and Judd Kahn in "All strategy is local":

In markets without barriers, competition is intense. If the incumbents have even brief success in earning more than nominal returns on investments, they will find new entrants swarming in to grab a share of the profits. Sooner or later, the additional competition will push down to the firms' cost of capital.

http://zenway.com/d/sites/default/files/All_Strategy_Is_Local.pdf

 

MoneyGram doesn't seem to have been very successful in displacing Western Union. Judging by MoneyGram's historical price level, the market probably thought differently up until 2007?

 

ValueLine on Western Union:

Adjacent services such as direct-to-bank or card and ATM money transfers ought to spur core growth. The company has spent 20 years building up its extensive network of agents, which it expects to double in size to some 1 million over the long term. This agent base would be quite difficult for a competitor to replicate, providing a high barrier to entry, in our view. We expect core operations to keep returns on capital high for the foreseeable future.

 

Western Union has bright growth prospects outside of its core operations. In November of 2011, it completed the acquisition of Travelex, a global business-to-business payments provider. The objective of this business is to serve small businesses’ cross-border payment needs. This market is fueled by international trade and appears largely underserved; WU believes its true size exceeds $24 billion. The company is also looking to build out its electronic channels business from around $150 million at present, to $500 million by 2015. It has an office in Silicon Valley where it plans to invest $35 million to build up its offerings of online, e-commerce, and mobile transfers. The new WU Pay platform allows online U.S. shoppers to choose the option at the checkout page, and the order is confirmed with a bill sent to their e-mail address. Consumers pay the bill the same way they pay their utilities, loans, insurance, and other bills, either through their online bank account or Western Union agent locations in the U.S. The services should appeal to those without bank accounts, as well as those who cannot obtain a credit card. We find value in the company’s digital strategy, and think it will help drive impressive returns on capital in the coming years.

http://www.valueline.com/Stocks/Screen.aspx?id=12842

 

Pabrai would perhaps ask "Will the business attract larger competitors who are willing and able to operate with substantial long term losses?". What would happen if Google decided to compete with WU? Wouldn't Google customers first need a credit card, a local bank account and an expensive mobile phone? From where would Google's customers pick up the cash that was transferred, maybe everything is digital in the future?

 

The picture I can't get out of my head is that transferring money is very similar to sending telegrams. Western Union sent its last telegram in January 2006:

http://www.academia.edu/1682283/Turning_an_Elephant_around_in_a_Bathtub_Managing_Western_Unions_Post-World-War-2_Decline

[Guest hellsten]

Further proof of a wide moat:

- Western Union net margins were pretty much unaffected by the market crash in 2008-2009.

- Fraud prevention. The $100 million fine MoneyGram received in 2012 might scare many of WU's potential competitors:

the U.S. Justice Department announced that MoneyGram International had agreed to pay a $100 million fine and admit to criminally aiding and abetting wire fraud and failing to maintain an effective anti-money laundering program.

http://krebsonsecurity.com/2012/11/moneygram-fined-100-million-for-wire-fraud/

 

By the way, MoneyGram management compensation seems crooked:

Back in July 2007, MoneyGram’s stock was trading at $30 per share and the money-transfer business was booming. At that time, CEO Philip Milne and top management told analysts that despite the company’s investments in mortgage-back securities, its investment portfolio was doing just fine. That all changed in January 2008, when $860 million of bad investments, including assets backed by subprime mortgages, bit MoneyGram in the behind.

Sure, she was No. 6 on Fortune’s highest-paid women executives list in 2009. Yes, her salary and options total something close to $18 million annually.

 

http://www.dmagazine.com/Home/D_CEO/2011/November/MoneyGrams_Turnaround_Artist.aspx?page=2

[ExpectedValue]

If you really dig deep and start pricing out different popular corridors you'll see that MoneyGram has managed to beat WU on pricing while offering similar coverage.

 

MoneyGram may not have replicated WU's entire market but they are going after the most profitable parts of WU's network. It may be slightly less reliable but the value proposition is enough to get customers to switch or force WU to cut prices.

 

Take time to look at the numbers released in October you will see some one time issues from regulation in Mexio/Central America where WU customers were having to put up with onerous terms relative to MGI/Dolex customers but a big part of it came from straight up price competition.

[ItsAValueTrap]

What about their management? Wasn't the Travelex acquisition value destroying?

My gut feeling is that the new CEO is engaging in a diworseification program and making dumb acquisitions.  It's not a safe thing to do when WU (Western Union) is so highly levered.

 

2- Moneygram versus WU:  WU has always enjoyed higher margins and better profitability.  WU's larger network offers more convenience... apparently it is very difficult to duplicate.  You need a large staff just to handle compliance.  Navigating the fraud/convenience tradeoffs requires a lot of skill and expertise.

 

3- A bit of this feels like Fannie Mae.  Fannie Mae has a great franchise because the government implicitly guarantees its debt and therefore it has low borrowing costs.  Unfortunately, terrible management ran it into the ground.

 

Buffett sold out of Fannie and Kraft due to bad management.  I don't think it's worth messing around with terrible management... management can destroy value faster than it is being created.