WU Western Union Company

We are upgrading our recommendation on Western Union Co. (WU) to Outperform from Neutral before its third quarter earnings release as we believe that the leading global money transfer company is set to benefit from a growing remittances market.

Western Union’s key business, Consumer-to-Consumer, accounting 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 crisis. We believe that this business segment will continue to be attractive as global mobility is expected to keep on increasing.

The United Nations estimates the global migrant population to grow from 191 million in 2005 to more than 280 million in 2050. Given vast agent locations coupled with agent growth continuing in higher-growth international markets (like Philippines, Australia, Japan, China), Western Union is attractively poised to participate in the growing money transfer market.

Western Union is also aggressively ramping up its other business - Global Business Payments in the rapidly growing cross-border payments market for small- to medium-sized enterprises. The business made an instant foray in this market with the acquisition of Custom House in 2009,which has been renamed as Western Union Business Solutions.

Recently, Western Union announced that it is acquiring the global business payments division of Travelex for about $970 million. We believe this is a strategic acquisition for the company as it adds size and scale in a growing industry where it currently has a small share of the market. In addition, we believe this acquisition will help the company build out another source of revenue generation, helping it to diversify away from its strong presence in the consumer-to-consumer money transfer market.

Western Union is expanding internationally and is eyeing the emerging economies of China and India where the remittance market is still under-penetrated. Given a superior brand value and reputation, the company faces lower competition in these regions compared to U.S. and we expect a growing share of revenue from these markets going forward.

Western Union has a wide agent network (currently 470,000 agent locations in more than 200 countries), which has grown rapidly over the past few years enhancing its global presence. The company has ties with several established institutions like banks and post offices in many countries, which provide easy access to local customer bases along with reducing capital needs.

Though going forward, we expect to see a moderation in agent growth given its already huge size, we expect the company to keep appointing agencies in new markets. Western Union’s unique ability to appoint and manage such a vast agent network gives it a superior advantage.

Western Union is making investments in electronic channels, which are likely perceived as competitive threats. The company is aggressively seeking these electronic 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 total company revenues for FY10, are expected to increase their contribution to 3% in FY11. Recently the company created a new unit named Western Union Ventures, which will feature the above new-age service offerings to customers.

Lastly, we note that the company also has a solid financial position. It has been generating significant cash from operations, which it has reinvested in the business to fund growth initiatives, make acquisitions, repay debt while also taking shareholder friendly measures such as share repurchases and regular dividend.

Thus given the favorable operating dynamics surrounding the company we expect Western Union to once again spring an earnings surprise during its third quarter earnings scheduled on Oct 25, continuing with the same trend for the past four trailing quarters which averaged at 8.5%.  The Zacks Consensus estimates EPS of 39 cents in the third quarter which would translate into an earnings growth of 11.7% year over year.

Western Union closely competes with Moneygram International Inc. (MGI), which is slated to release earnings on Oct 27.  

 
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