WU - Western Union

[Guest hellsten]

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.

 

Thanks, I had a look at the numbers:

- C2C 81% of Company revenue

- C2C revenue decreased 4%, or 1% constant currency,* on flat

transaction growth

- Western Union branded constant currency revenue grew slightly on

transaction growth of 3%

- Total Q3 Western Union cross-border principal of $18 billion

- Declined 7% on a reported basis

- Declined 4% constant currency*

- Principal per transaction

- Declined 6% on a reported basis

- Declined 3% constant currency*

http://ir.westernunion.com/files/doc_presentations/WU%20Q3%202012%20Slides%20FINAL%20102912.pdf

 

Revenue declined, but margins were basically unchanged.

 

Morningstar has written about the price war:

The company has reduced fees 14% over the past four years and has seen operating margins excluding one-time items improve 220 basis points over the same period. This margin improvement has largely been driven by lower commission rates paid to agents. But even after stripping out the effect of lower commission rates, we can see that margins from 2007 to 2011 have basically held flat, going from 26.3% to 26.0%. The ability to maintain margins despite ongoing price decreases and a difficult macro environment is further evidence that the company's advantage rests primarily on scale, in our opinion.

http://seekingalpha.com/article/902081-dissecting-the-sources-of-western-union-s-moat

 

MoneyGram is hurt more than WU by this price war. WU's margins haven't been hurt so far, but this of course might change in the future at least that's what the market believes.

[Guest hellsten]

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.

 

Goodwill and intangibles amount to half of market cap. They paid 4 times earnings for Travelex, in cash, so I guess you could say management is destroying value:

http://business.westernunion.com/resource-center/articles/post/Western-Union-to-Acquire-Travelex-Global-Business-Payments.aspx

[zippy1]

 

2- Moneygram versus WU:  WU has always enjoyed higher margins and better profitability.  WU's larger

Goodwill and intangibles amount to half of market cap. They paid 4 times earnings for Travelex, in cash, so I guess you could say management is destroying value:

http://business.westernunion.com/resource-center/articles/post/Western-Union-to-Acquire-Travelex-Global-Business-Payments.aspx

 

Didn't they paid 606million pound for 150 milllion pound revenue with 30% ebitda margin?  Wouldn't this mean paying 606million pound for 45million ebitda? Like 13.5X?

[Guest hellsten]

 

2- Moneygram versus WU:  WU has always enjoyed higher margins and better profitability.  WU's larger

Goodwill and intangibles amount to half of market cap. They paid 4 times earnings for Travelex, in cash, so I guess you could say management is destroying value:

http://business.westernunion.com/resource-center/articles/post/Western-Union-to-Acquire-Travelex-Global-Business-Payments.aspx

 

Didn't they paid 606million pound for 150 milllion pound revenue with 30% ebitda margin?  Wouldn't this mean paying 606million pound for 45million ebitda? Like 13.5X?

 

Yes, sorry. I meant "4 times revenue".

 

Here's a bit more information about the acquisition:

http://ir.westernunion.com/files/events/Inv_Slides_FINAL2_070411.pdf

 

I don't know if the Travelex acquisition destroys value or not. I also don't know if the goodwill is a bad thing or not.

 

I would definitely have to analyze and see what management is doing before getting comfortable investing in WU. Is WU a company that could be run by idiots? I guess so, but MoneyGram certainly doesn't seem to be one :)

[valuecfa]

I haven't read this thread or studied Western Union's financial at all, but at first glance the business that the company is in seem to be a terrible one to be in going forward. There are just a ridiculous number of money transfer services that have started up in the past few years that I would think will eventually eat away at WU's margins. WU has an  advantage for those without checking accounts with their retail locations, but it is just so easy to transfer money these days over the web if the recipient has a checking acct, and some are even free.

 

I think the money transfer business will be an extremely low margin business 5 to 10 years from now.

[ItsAValueTrap]

I haven't read this thread or studied Western Union's financial at all, but at first glance the business that the company is in seem to be a terrible one to be in going forward.

That was my bias too.  Most of their customers are immigrants or migrant workers (some legal, some illegal).  It's hard for them to get chequing accounts.  They are paying for convenience and peace of mind.  I believe other methods of transferring money would be a huge pain in the butt.

 

I think if you look at financial services in general, there are a lot of people who pay a premium for convenience.  Currency conversion has crazy margins... but it's not like people are opening up Interactive Brokers accounts to do their currency conversions (with IB you pay a few dollars in commissions and whatever the spread is, which is usually several pips).  There are many people out there who have credit card debt (or payday loans).  There are many people who have cash sitting around in financial accounts collecting very little interest... many don't bother shopping around for the highest interest rate (backed by gov't insurance).

[turar]

I wonder how easy it is to enter this market with next to nothing setup costs. If starting small and in niche local markets, say targeting Mexico or Philippines abroad, and a few major urban areas in the US. Setup kiosks in the malls, setup a basic IT system (even a simple shared Google Docs spreadsheet as a most primitive example would do, with a customized solution an obvious next step). Plus some initial capital in target locations (Mexico, Philippines) to be able to dispense cash instantly. Et voila, you can accept transfers. Every now and then resupply target locations with additional capital via simple wire transfers (large amounts at once).

[Guest hellsten]

I haven't read this thread or studied Western Union's financial at all, but at first glance the business that the company is in seem to be a terrible one to be in going forward. There are just a ridiculous number of money transfer services that have started up in the past few years that I would think will eventually eat away at WU's margins. WU has an  advantage for those without checking accounts with their retail locations, but it is just so easy to transfer money these days over the web if the recipient has a checking acct, and some are even free.

 

I think the money transfer business will be an extremely low margin business 5 to 10 years from now.

 

Yes, valid points but it's not all about technology, it's also about human behavior (banks, agents, customers).

 

http://www.nytimes.com/2007/11/22/world/22western.html

 

“Global migration is the cornerstone of how we’ve grown,” said Christina A. Gold, Western Union’s chief executive.

 

Western Union’s zealous pursuit of migrants can be seen in a government office in Manila, where a half million Filipinos a year wait to have their papers processed before leaving for overseas jobs. Everything in the waiting room is labeled “Western Union”: the backs of the chairs, the tops of the desks, the bottom of the queue sign and the front of the menu in the adjacent cafeteria. The walls are even painted Western Union yellow.

 

Ernald Vincent Mendoza, a restaurant supervisor in Saudi Arabia, dismissed his wife’s argument that the company’s pricing hurt the poor. Though banks are cheaper, the money can take a week to arrive, he said, while Western Union sends it instantly. “If they have good quality and service, you have to pay for that,” he said.

 

Emmanuel Ellorian, a waiter in Dubai, said Western Union agents came to the hotel where he worked and processed the transfers there. “If any of the Filipino clubs have an event,” he said, “one of the sponsors is Western Union.”

 

One agent on Western Union:

Among them is Michael Lee, 35, who owns an electronics store called World Top Communications in New York’s Chinatown. Sharing a building with a “lupus and tumor consultant,” on a block of East Broadway that smells of dried shrimp, he was told by Western Union to expect a few hundred transactions a month.

 

He now does 100,000 a year, he said. Mr. Lee, who earns about $2.50 per transaction, is so enthusiastic he persuaded his landlord to paint the building yellow, and the company donated $16,000 worth of paint.

…

Many of his customers are in the country illegally. Mr. Lee, who was once an illegal immigrant, said his business fell by about 40 percent last spring after a series of nationwide immigration raids. “A lot of people don’t have green cards — they are afraid,” he said.

 

One critic who now gives Western Union grudging credit is Donald F. Terry, an official at the Inter-American Development Bank. He has spent years trying to get more migrants to use banks, so they could establish financial histories and qualify for loans.

 

But banks have not fully welcomed migrants, he said, while Western Union and other money transfer companies have more locations, better hours and agents who know their customers’ language and culture.

 

“You could say they were ripping people off, or you could also say they’re providing a service that poor people desperately needed and were willing to pay for,” Mr. Terry said. “Any consumer company in the world would like to have the customer loyalty they have. They’re doing something right.”

 

 

[Guest hellsten]

I wonder how easy it is to enter this market with next to nothing setup costs. If starting small and in niche local markets, say targeting Mexico or Philippines abroad, and a few major urban areas in the US. Setup kiosks in the malls, setup a basic IT system (even a simple shared Google Docs spreadsheet as a most primitive example would do, with a customized solution an obvious next step). Plus some initial capital in target locations (Mexico, Philippines) to be able to dispense cash instantly. Et voila, you can accept transfers. Every now and then resupply target locations with additional capital via simple wire transfers (large amounts at once).

 

My guess is that regulation and laws make it very difficult. What would happen if you had a company that regularly sent money to e.g. Sudan, Iraq or Mexico?

[Guest hellsten]

Todd Combs on Western Union:

“One of the central objectives with respect to each of our investments is to identify all relevant risks,” Combs said in an Oct. 19 letter to investors touting Western Union Co., the world’s biggest money-transfer business. “If we can find quality businesses at attractive risk-adjusted valuations, then we should be able to meet our investment objectives over time.”

http://www.bloomberg.com/news/2010-10-27/berkshire-picking-hedge-fund-manager-combs-shows-buffett-prefers-defense.html

 

Does anyone here know if Castle Point Capital's letters can be found online?

[sethatk]

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

Philippines.

[StubbleJumper]

I wonder how easy it is to enter this market with next to nothing setup costs. If starting small and in niche local markets, say targeting Mexico or Philippines abroad, and a few major urban areas in the US. Setup kiosks in the malls, setup a basic IT system (even a simple shared Google Docs spreadsheet as a most primitive example would do, with a customized solution an obvious next step). Plus some initial capital in target locations (Mexico, Philippines) to be able to dispense cash instantly. Et voila, you can accept transfers. Every now and then resupply target locations with additional capital via simple wire transfers (large amounts at once).

 

 

This already exists.  They are called Hawalas :

 

http://en.wikipedia.org/wiki/Hawala

 

 

[Green King]

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

Philippines.

 

Thanks

It seems Wal Mart is helping MoneyGram a bit.  A world wide push could be very damaging for Western Union.

[sethatk]

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

Philippines.

 

Thanks

It seems Wal Mart is helping MoneyGram a bit.  A world wide push could be very damaging for Western Union.

 

 

About 7,000 people leave the Philippines to work overseas daily. They do so to support their families back home. In my experience, which is a relatively small sample size, most used WU in the past, but do not currently. Now, people send prepaid credit cards in the mail, the Moneygram, and even open a savings account w/atm card and simply mail the card to their family. I think WU is business model/moat will continue to erode as technology continues to open different avenues.

[Olmsted]

I wonder how easy it is to enter this market with next to nothing setup costs. If starting small and in niche local markets, say targeting Mexico or Philippines abroad, and a few major urban areas in the US. Setup kiosks in the malls, setup a basic IT system (even a simple shared Google Docs spreadsheet as a most primitive example would do, with a customized solution an obvious next step). Plus some initial capital in target locations (Mexico, Philippines) to be able to dispense cash instantly. Et voila, you can accept transfers. Every now and then resupply target locations with additional capital via simple wire transfers (large amounts at once).

 

 

This already exists.  They are called Hawalas :

 

http://en.wikipedia.org/wiki/Hawala

 

These have some inherent competitive advantages too.  Yes, they probably cannot achieve the scale and efficiency of a WU-like operation, but they can move money discreetly.  Think opium and corruption money from Afghanistan to Dubai.

[ExpectedValue]

Revenues per Transaction over time for the consumer to consumer segment

 

http://www.highway6.com/grabs/Screen%20Shot%202013-01-28%20at%2010.39.47%20PM.png

[Kiltacular]

Hellsten,

 

You make some interesting points about Western Union.  I don't own it at this point.

 

This guy makes some interesting points.  Apparently, when he wrote this, he didn't own it but maybe he should have bought it:

 

http://www.gurufocus.com/news/202351/is-western-union-wu-too-risky-to-buy

 

He implies at the beginning of the write-up that he previously wrote something about WU and I feel like he did -- and that I read it.  I can't find it now.

[Guest hellsten]

Hellsten,

 

You make some interesting points about Western Union.  I don't own it at this point.

 

This guy makes some interesting points.  Apparently, when he wrote this, he didn't own it but maybe he should have bought it:

 

http://www.gurufocus.com/news/202351/is-western-union-wu-too-risky-to-buy

 

He implies at the beginning of the write-up that he previously wrote something about WU and I feel like he did -- and that I read it.  I can't find it now.

 

Thank you. I didn't know Geoff was interested in WU. Geoff and Hoang have been writing a lot about WU:

 

 

From http://www.gurufocus.com/news/202351/is-western-union-wu-too-risky-to-buy:

I haven't come to a conclusion on Western Union. It is cheap. But at about 6 times EBITDA it is not insanely cheap. There are risks. I think the technology risk is overstated. If it was cheaper I would be confident in taking the other side of that bet (that technology will hurt them slower than people think). But right now I am most afraid of buying a relatively cheap stock in an absolutely expensive stock market environment.

 

A price of 6 times EBITDA is low for a sure thing. But is Western Union a sure thing? Just because it is more attractive than most stocks does not mean I should buy it.

 

There is always the option of staying in cash. So I haven’t decided whether to buy Western Union stock or not.

 

From http://gannonandhoangoninvesting.com/blog/2012/12/5/capital-allocation-discounts:

Western Union’s management is competent but overly optimistic.

 

Take Western Union (WU). Western Union made several acquisitions over the last few years. They overpaid.

 

That’s the bad news. The good news is that Western Union never stopped buying back its stock. And when they needed money – they borrowed. They didn’t issue stock.

 

From http://gannonandhoangoninvesting.com/blog/2012/12/19/my-investment-process:

 

Reading interviews, earnings call transcripts and compare what the management said with results also make me better at judging people. I can easily find that Royal Caribbean’s management is quite promotional. Carnival’s Micky Arison is honest and blunt. Or Western Union’s management is competent but overly optimistic.

 

…

 

I think anchoring causes some misconception about Western Union (WU). When Geoff asked me to analyze WU, my quick answer was “it might be too hard, the service is expensive, and there can be a lot of changes.” But after I looked deeper, I realized it’s not as hard as I thought. The service is not expensive like most people think. Why did I think it’s expensive?

 

That’s because I always use PayPal to do money transfer with friends. It’s free when I link my PayPal account to my bank account. My experience with PayPal makes me think a money transfer fee should be close to 0%.

 

It’s different from the perspective of customers. I talked to my cousin who went to work in Taiwan. He uses Western Union to send money home every month. He’s highly satisfied with the service. Customers only think a product is expensive when there’s a much cheaper alternative. Western Union has a small price premium over competitors, but they keep the price competitive. And PayPal is not cheap. PayPal International transfer from bank accounts costs 0.3-3.3% fee and currency conversion. It costs over 3.4% to send from debit card/credit card.

 

From http://m.gurufocus.com/news_read.php?id=201705:

 

For example, Western Union (WU) will have lower earnings next year than this year. The company expects a 10% to 15% decline in earnings due to price cuts that will start to be offset within the next 6 months to 18 months by more volume.

 

Instead, let's assume they are too optimistic. Let's assume a 20% decline due to price cuts. And no offsetting volume increase. Let's just assume the normal level of earning power is 20% below this past year's earnings.

 

Operating earnings were $1.385 billion last year. Let's lop 20% off that number. We get $1.108 billion. Now, let's apply a 35% corporate tax rate. In reality, much of Western Union's business is outside the U.S. so it is never taxed as high as 35% - but we want to err on the side of conservatism. That would leave $720 million in net income. There are currently 615 million shares outstanding, so our estimate of after-tax earning power is $1.17 a share. This is potentially conservative for three reasons:

 

1) We made a much more pessimistic assumption about near-term earnings and price elasticity than management did (20% drop with no increase due to lower prices versus idea of 15% drop that they recover from over time)

 

2) We assumed a 35% tax rate which is more than WU ever pays

 

3) We used net income rather than free cash flow. WU does a much better job of converting net income into free cash flow than most companies. So, it should trade at a higher P/E ratio if it is to trade at the same price to free cash flow as most stocks.

 

So there we have it. Our estimate - which we believe to be conservative - of $1.17 a share in "owner earnings." The stock price is $13.11. So $1.17 / $13.11 = 9%. That is a 9% owner earnings yield. Western Union does not require much capital to expand its business (just signing bonuses) so any growth beyond its present earnings would basically fall straight to our total returns. In other words, we would expect to earn 9% plus growth in the stock. If WU grew earnings by 3% a year we would expect to earn 12% a year in the stock.

 

More on Western Union:

http://www.gurufocus.com/news/198067/whats-your-investing-routine

If you tallied up the actual amount of time I spend reading – you’ll find I actually spend more time reading competitor 10-Ks than anything else. For example, if I’m looking at a grocery store chain or a railroad – I may have six other “peer” 10-Ks to read. Other companies have no public peer. Western Union has one: MoneyGram. So I will spend almost half my time reading about MoneyGram.

 

He has done a very deep analysis of WU. I haven't, but it seems we have reached pretty similar conclusions.

 

To summarize:

- WU is misunderstood (it takes 5 minutes to "understand" that there's no future for Western Union. stock hasn't gone anywhere.)

- WU is pretty cheap (5-6 times EBITDA)

- Competition is not very good (MoneyGram competing on price, incompetent management, etc)

- Very strong brand (98% brand awareness in India)

- Very strong moat (Strong brand, large network, net margins stable, human behavior)

- Globalization, immigration and the unbanked are not going away anytime soon.

- Fears over new technology doesn't look like a big issue. (It will take many years to erode Western Union's moat and they are expanding their digital presence in the mean time. Regulation makes it very hard for competitors to enter the field.)

- Revenue per transaction is declining but revenue has been quite stable. Net profit margin is not hurt. (Western Union requires very little capital to grow. Buying back shares. If transaction costs go down they can lower their costs and perhaps continue to grow their market share.)

- Management seems competent (Geoff's conclusion)

- Overpaid for acquisitions (Geoff's conclusion)

 

What could kill Western Union? IMHO competition from banks, PayPal, MoneyBookers, Google, etc is very unlikely to kill the company. Here's a biased comparison from MoneyBookers that shows why I think Western Union is not going away:

https://www.moneybookers.com/send-money/money-transfer-fees/

 

The key is the "Receiving options" column.

 

Anyway, I won't buy Western Union yet. I will keep it on my watchlist. It's a very interesting company.

[Kiltacular]

Hellsten,

 

To be honest, WU is starting to feel like a it is good for a 50% gain.  This is beginning to feel like HRB or MCO at the lows. 

 

Thanks for posting your thoughts.

[mcliu]

I recently sold my shares, since I felt uncomfortable with a couple of concerns:

 

- Management's abilities. Overpaying for acquisitions

- Increased competition, both existing and new. It seems like competition has really heated up on some of the high volume corridors. WU's reaction is the cut prices and try to strangle their competitors. However, it seems like MoneyGram's been managing their margins quite well despite underpricing WU.

[Guest hellsten]

Western Union's online competitor Xoom is now publicly traded:

http://finance.yahoo.com/q?s=xoom

 

Mr. Market is happy and sends shares up by ~60%:

http://online.wsj.com/article/SB10001424127887323478004578306030561955760.html

 

The company has never been profitable, but it recorded $80 million in revenue in the 2012 calendar year, up 60% from the year earlier. It is the potential for growth that has helped woo investors, analysts said. Xoom has increased the amount of funds it sends at an annual rate of 88% a year since 2007. Xoom expanded its active customer base by 50% in 2012, according to its prospectus.

 

Compare this to Western Union's Digital Ventures presentation (March, 2012):

- $100M+ revenue 2011

- 35% growth in 2011

- 1 M+ active users

- goal of $500M+ digital revenue by 2015 (need to grow 50% per year)

 

http://ir.westernunion.com/files/doc_presentations/WU%20Barclays_FINAL%20(0328).pdf

 

1 year later it looks like WU has met their target of 50% growth:

http://seekingalpha.com/article/1176841-the-western-union-management-discusses-q4-2012-results-earnings-call-transcript

Westernunion.com money transfer transactions grew over 40% in 2012, and we believe we will see significantly higher transaction growth in 2013. Revenue exceeded $150 million last year, and we remain on track to meet our $500 million digital goal for 2015.

Transactions for electronic account-based money transfer through banks increased over 50% in 2012. And we are focused on expanding the service to more banks in 2013, as we believe this electronic channel also represents strong incremental opportunity.

 

Westernunion.com C2C revenue increased 16% on a reported basis and has no impact from currency. Transaction growth accelerated to 46%, largely driven by the success of promotional and enterprising investments intended to accelerate customer acquisition. As a reminder, westernunion.com results are not included in the growth rates for the other 5 regions, although they are included when we discuss specific country trends.

 

Total electronic channel revenue, which includes westernunion.com, account-based money transfer through banks and mobile increased 22% in the quarter. Electronic channels represented 4% of total company revenue, up from 3% of revenue in the year ago period.

 

Revenue from account-based money transfer through banks increased 37%. We now have nearly 115 banks signed for account-based money transfer, with service launched at over half of these banks.

 

More on Xoom:

 

http://www.bizjournals.com/sanfrancisco/print-edition/2012/07/20/western-union-battles-for-payments.html?page=all

 

Also fighting for market share are Burlingame-based Nexxo Financial Corp., San Francisco-based Xoom Corp. and Palo Alto-based Boom Financial Inc., which announced a $17 million round of funding this week to support a novel subscription-based model. None disclose revenue, but Xoom recently said it sent $1.7 billion in 2011 to 30 countries and Nexxo says it has done $1 billion-plus since 2003.

 

Xoom's network is not very impressive:

https://www.xoom.com/xoom-locations

 

My guess is that Xoom is better than Western Union at attracting IT people, i.e. they will have a technically better digital product:

http://www.simplyhired.com/a/jobs/list/c-western+union+digital+ventures

https://westernunion.taleo.net/careersection/10044/jobsearch.ftl?lang=en&location=200000940

vs:

http://www.simplyhired.com/a/jobs/list/c-xoom

 

Will it matter if WU has a better brand and network?

[Guest hellsten]

http://valueinvestingletter.com/pdfs/Boyars-Intrinsic-Research-Report-Western-Union.pdf

 

While Wall Street never likes near term setbacks, we would note that Western Union has a history of

success in reversing adverse trends through pricing initiatives. During the Company’s 3Q 2012 earnings call

CFO Scott Scheirman stated, “We’ve done hundreds of pricing actions. We know how to do these. And the key

for us, it’s about getting more transactions, more customers, improving our share. We know near-term that will

impact the financial results, but long-term that will help grow revenue and profits.” As illustrated in the following

chart, Western Union successfully repositioned its domestic money transfer business during 2009. Following its

pricing actions where it offered consumers the ability to send $50 (principal amount) for $5, the Company

experienced strong growth in transactions, revenue and market share.

 

MoneyGram International has

boasted about its strong results recently from Mexico, suggesting traditional competition is indeed the main

culprit. As we noted above, Western Union has a good track record in implementing pricing initiatives. In

addition, Western Union boasts superior profitability than its largest peer and is in a significantly better financial

position than primary competitor MoneyGram. Accordingly, and as noted above, we believe MoneyGram is

unlikely to counter with any aggressive price actions of its own.

 

 

Despite the proliferation and increased penetration of smartphones (smartphone penetration in the U.S.

is believed to be ~50%), mobile money transfers represent a very small portion (~1%) of the global remittance

market.

…

it recently took over a year for Safaricom to create a mobile remittance service

for just one corridor (the UK and Kenya) due to foreign exchange negotiations between each country’s central

banks. Mobile payments also present national security threats given concerns about global terrorism. As a result

of these considerations, it is unlikely that mobile payments will be rolled out en masse and when they are, the

transfer of money will likely involve an intermediary such as Western Union who is able to offer compliance

oversight and foreign exchange capabilities.

 

In fact, in 4 of the 7 major regions around the world, cash represents over 90% of purchases and payments.

 

[Guest deepValue]

Any ideas on who would/could make a bid for Western Union?

[myvalueedge]

Research shows a growing remittance market globally and predominately cash transactions for send and receive.  WU can make pricing adjustments on certain corridors (i.e. cut rates and increase transactions) to take back market share without largely affecting total revenue and earnings over a 3-5 year period.  Besides the number of locations I think the $100M/year on compliance spend widens the moat and allows WU to grow globally without a hiccup.  WU has 4x the revenue then Moneygram (2nd largest competitor), close to double the margins, and +2x the locations.  Still looking at normalized FCF yield of 11-12% in 2014, decent allocation (overpaid for B2B businesses) with dividend hikes and share repurchases.  My assessment does not factor in any improvement in the B2B business or the growth channels (westernunion.com etc.).

 

Reminds me of HRB.  Concerns with prior mortgage unit (reps and warranties) and lower tax returns kept the stock low.  I sold at around 8% FCF yield ($20/share) and it is now trading over $29/share.  I think WU could be bid up to a 5-6% FCF yield over the next few years considering the moat and time past since the pricing adjustments reflecting a price over $24/share.  If the stock remains depressed PE could come in with a LBO as the business now is levered at 1.2x debt/EBITDA. 

 

Mobile and online remittance does not seem to have put a dent in WU yet.  The pricing adjustments will be against traditional competitors.  Think about the money it would take to scale promoting online remittance globally.  I certainly think it can be done in certain corridors and be built overtime by various competitors in each corridor.  Western Union will be able to compete for the online remittance through westernunion.com (projecting $500M in revenue by 2015) and can promote through 510K locations.  Also, margins for online remittance are much higher as you do not have to pay the commission to the agents.

 

The next few quarters will have depressed earnings.  I am hoping the market beats it down under $13/share again so I can raise my stake. 

 

 

[Philip Morris IV]

Has anyone noticed that WU has really ramped up their advertising lately?  I see their ads online all the time and today, heard one on the radio in the grocery store.