WU Western Union Company

We are reiterating our Neutral recommendation on the shares of Western Union Co. (WU) following second quarter 2011 results. The company reported second quarter earnings of 42 cents per share, beating the Zacks Consensus Estimate by 5 cents per share, on the back of strong margin improvement led by its Consumer-to-Consumer (C2C) segment. Earnings per share (EPS) also surpassed 36 cents per share recorded in the prior-year period. 

Western Union’s key business, C2C (accounts for more than four-fifth of total revenues), has been witnessing growth for the past several years except 2009, which was adversely affected by the economic slump. Number of transactions increased at an average rate of 10% between 2006 and 2010.  In 2010, the segment saw a revenue growth of 2% primarily due to a transaction growth of 9% compared with a revenue decline of 4% based on a transaction growth of 4% in 2009. The Americas region delivered 5% revenue growth in the second quarter mainly due to the pricing reductions taken at the end of 2009. This repositioning will expectedly continue to deliver revenue growth throughout 2011. Asia-Pacific is also expected to perform well in 2011 given the favorable results from countries like Philippines, Australia, Japan, China.

Western Union is making investments in electronic channels, which are perceived as competitive threats. These include WesternUnion.com, account-to-cash, mobile and pre-paid cards.

Presently, the company’s electronic channels include 40 banks that have agreed to offer account-based money transfer through their online banking portals.

In the Mobile Money Transfer segment, there are 14 agreements in place with mobile network operators and banks, and the company has also enabled over 80,000 of its agent locations in 48 countries to provide cash through mobile service.

Its WesternUnion.com, which allows consumers to send funds online, has also been expanded to 20 countries.

The above data shows that the company is aggressively seeking channels to offset the decline in traditional money transfer. However, we believe that the transition to these newer technologies will be more evolutionary than immediate. These channels, which represented 2% of the total 2010 revenues, are expected to increase their contribution to 3% in 2011. Recently, the company created a new unit named Western Union Ventures, which will feature the above-mentioned new-age service offerings to customers.

Western Union is also delving into offering prepaid card – a new product that would provide additional services to new and existing consumers in a fast growing global market. The company has increased its cards in force in the U.S. to 890,000, with retail distribution at nearly 9600 locations.

For the year 2010, over $350 million of principal was loaded onto the Western Union prepaid cards through 1.5 million loads. Though prepaid revenue in 2010 was not substantial and mainly driven by third-party top up, in 2011 the company expects the early results of the CCH tax refund card offering as well as the benefit from the income distribution to materialize. Internationally, its prepaid group is working with multiple country teams around the world to gear up for prepaid launches. We believe there is major global opportunity in prepaid and that the company is positioned to compete effectively. Prepaid, including third-party top up, is likely to grow and account for approximately 1% of the revenue.

Revenue from Western Union’s Global Business Payments benefited from the 2009 acquisition of Custom House, which has been renamed as Western Union Business Solutions. The business contributed an operating loss due to integration expenses, intangibles or amortization, and investment spending for future growth. However, it is expected to deliver mid-teen revenue growth in 2011 and will no longer be dilutive to EPS.

The company also announced the acquisition of Travelex Holdings in June 2011. It would give the company a presence in 16 countries, including 7 where Business Solutions are currently absent. The segment will have a combined sales force of 450 people, strong product and service capabilities, as well as extensive bank and banking and payment connectivity across the world.

The company’s business to business market is big and growing, with the cross-border payments needs of small businesses largely remaining underserved. The Travelex Global Business Payments will help the company serve the small- and medium-sized enterprises, besides serving the third-party distribution channels. This acquisition, which is expected to close later this year, will be a great growth opportunity for the company for many years to come.

Western Union has been generating significant cash from operations, which it has been reinvesting through acquisitions and share repurchases, as well as regular dividend hikes. With a cash balance of $2.1 billion as of June 30, 2011, the company has adequate financial flexibility. It is further reinforced by the company’s recent 50% increase in quarterly dividend. Besides, it repurchased 5.3%, 3.5% and 7.9% of outstanding shares during 2010, 2009 and 2008, respectively. On February 1, 2011, its Board authorized an additional $1 billion stock repurchase program through December 31, 2012. The remaining authorization of $1,416 million will expectedly exhaust by 2012 end, thus benefiting bottom-line earnings.

Western Union closely competes with MoneyGram International Inc. (MGI), which also carries a Neural recommendation.  

 
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