The Company
Overview
The Western Union Company (WU) is the global leader in remittance payments. It specializes in money
transfer across national borders. The company caters to individuals who are “underbanked” and who deal
primarily in cash. In an increasingly globalized world, the number of immigrants from poorer countries to
ones with more opportunity will continue to grow. In this situation, oftentimes families are left behind in
need of support, and they use WU’s service to send money back home.
Business Model
WU’s business is extremely capital-light. The company employs “agents,” who act as employees around
the globe. Unlike traditional employees, these agents are paid strictly on percentage of revenue generated.
Therefore, adding a WU money transfer service location is inexpensive. It is as simple as training a store
owner and putting a WU sign on the storefront. Because of this, WU’s business is very easily scalable and
poised for growth. Currently, the company operates in 3 segments: Consumer-to-Consumer (C2C),
Consumer-to-Business (C2B), and Business Solutions (B2B).
Consumer to Consumer—82% of 2012 Revenues
The C2C segment represents the core of WU’s business. Representing over 500,000 agent locations
worldwide, this segment generates revenue from transaction fees as well as foreign exchange fees.
Currently (and traditionally), the majority of the business in this segment has come from walk-in cash
transfers. But, the company is beginning to provide debit card, credit card, and mobile payment services
as well. Online person-to-person transfers also fall under this segment.
Consumer-to-Business—11% of 2012 Revenues
The C2B segment represents the revenues generated by money transfer services sent by individuals to
businesses, typically for bill payment-type services. Revenues are driven primarily by transaction fees,
which tend to be lower than those of the C2C segment.
Business Solutions—7% of 2012 Revenues
The B2B segment focuses primarily on money transfers across borders between businesses. The majority
of this segment’s revenue comes from foreign exchange rate differences.
Economic Moat
WU’s wide economic moat comes primarily in the form of its network. Its business model is such that any
geographical market is penetrable. It is estimated that the company has 82% brand awareness globally. In
addition, the moat is strengthened by the company’s brand name. Especially in the money transfer
industry, a great deal of trust between the customer and the company is imperative, which facilitates
brand loyalty. In many underdeveloped countries, remittance payments account for a substantial portion
of GDP. In El Salvador, they account for over 15% of the economy.
WU has also been able to strengthen its network and presence with strategic partnerships with other
businesses. In particular, it has begun relationships with EZ-Corp (a publicly traded pawn and cash
advance company), Family Dollar, and Wal-Mart. Not only does this set the company up well for
expansion, it also makes it more accessible to WU’s target clientele.
Acquisitions
WU has been proactive in adapting to a shifting market in large part by its acquisition strategy. It has
begun expanding in the C2B and B2B segments, especially in the European region. The United States has
traditionally been the major sender of payments, but the company believes that the Eurozone is an
opportunity for significant growth in originated transactions. The company’s return on assets and return
on invested capital are beginning to pick up significantly since slowing post-2008.
Travelex Global Business Payments (TGBP)—November2011
Contributing 4% of 2012 revenue growth, TGBP is a French-based cross-border payment company. They
specialize in small business payment and foreign exchange solutions. WU believes that the company will
immediately solidify its business solutions segment.
Direct Competitors
WU
MGI
Operating Margin
21%
15%
Profit Margin
8.9%
4.9%
ROA
9.5%
0.6%
ROIC
25.9%
12.07%
In the remittance payment business, WU has
just one major publicly traded competitor,
MoneyGram (MGI). However, I do not see MGI
as much of a threat to WU’s core business. WU
has a larger network, more resources, and is in
much more stable financial shape. Further, WU
is more liquid and more solvent as MGI’s
liabilities exceed its total assets. In addition,
WU’s profitability is better
as shown by the nearby table of ratios, and it
processes three times the volume of transactions
as MGI.
Indirect Competitors
The most significant competitive pressure facing
WU is from its indirect competitors. With the technological shift in payment and services business, the
door to competition for WU has been opened. Suddenly, banks, credit card companies, and online
payment. It is becoming increasingly easier to send money instantly, previously a unique offering of WU.
WU has taken measures to compete, launching a money transfer online service and mobile application.
With continuing growth, the company expects digital revenues to increase to $500M by 2015. It has also
begun generating revenues (16% increase in 2012) by selling prepaid debit cards as an alternative to cash
payments.
Though there are concerns with this in the future, the company still holds a unique competitive advantage
in its ability to service customers who do not have bank accounts on the receiving end.
Financial Analysis
Profitability
From a profitability standpoint, WU has traditionally enjoyed exceptionally high margins from the
remittance payment transfer business. This is primarily due to how capital-light the business model is.
However, moving forward, there will be inevitable pressure on the company’s margins. As money transfer
costs decrease and the barriers to entry shrink, WU will suffer from restructuring and cost saving
initiatives. Though this has caused shareholders to fall out of graces, the long term holds opportunity for
WU to be able to adapt to shifting market conditions and maintain its profitable economic moat.
Valuation
The most attractive aspect of WU is its valuation. Based on dividend discount models and historical ratios,
the company is trading at a significant discount to fair value.
Model
The model used for my valuation was an equal weight combination DDM and P/E multiple target. The
target used was a conservative 9x earnings. Earnings and dividends were projected for 15 years using an
initial 12% growth rate decreased linearly to 2%, which was used to compute a terminal value. Then
discounting these using a weighted average cost of capital (WACC) between 9.5-10.5% yielded a fair value
of $18.15.
Looking at the historical P/E ratio for WU, the 3 year average is about 12. Using analyst consensus
estimates of $1.6 EPS for 2014, it would take a forward P/E of 11.25, still below average, to reach my fair
value estimate on a 1 year time horizon.
Even though results for 2012, and consequently for 2013, have fallen below expectations, the company has
continued its dividend growth and begun to repurchase shares. I see this as a vote of confidence moving
forward, as management is intent on maintaining shareholder confidence.
Currently the company has over $3/share in cash and generates $1.5/share in free cash flow each year.
Risk Factors
Pricing cuts
In the fourth quarter 2012, WU announced pricing cuts in its services. This was due in large part to
compliance and regulatory issues that resulted in a loss of agents in the Mexico-US corridor. As
competition sets in throughout the industry with the low cost of electronic payments, WU will likely
undergo margin pressures. Lower guidance
suggests that the company will see effects of this for the next year as well. But as the company realigns its
business, the global economy will be the key driver of growth.
Foreign exchange rates
Specializing in cross-border money transfer services inevitably opens the company up to foreign exchange
rate risk. The company does participate in currency hedging, which should prevent any traumatic effects
from a tail event.
Regulatory concerns
Due to the nature of WU’s business, it attracts business from illegal activity. This has traditionally been a
strength of WU as its lack of requisites caters to immigrants and cash-based transfers. However, with
ongoing uncertainty in FINRA and Dodd-Frank legislation, this will never be an immaterial concern for
WU’s business.
Stricter standards from immigration legislation could also adversely affect the company’s business.
Shift toward online and mobile payments
As discussed in previous sections, the move toward electronic payment systems opens up the doors for
competition to WU’s business. There is material risk surrounding this shift, and if WU is not able to
regain traction with online mobile customers, its business could suffer.
Overall economic conditions
Because of the concentration of business in remittance payments, WU’s revenues are heavily reliant on
the economic conditions of immigrant countries. When market conditions are unfavorable, oftentimes
cheap, immigrant labor is the first victim.
SWOT Analysis
Investment Recommendation
WU seems to be a case of overreaction on the part of shareholders. The company has been a victim of
technological development, which has begun cutting into its market share. But as long as there are
immigrants who need to quickly send money back home to underprivileged families. For the foreseeable
future, cash payments will still be a part of every culture, and as long as developing economies still exist,
there will be a place for WU.
There are clear risks moving forward, and if the company is not able to adapt well in its transition, its
future will not be as bright. But the most difficult time to buy is usually the best time to buy. I think that
WU’s brand name and global network are strong enough to weather the storm and resume growth in
2014. If it is able to do so, the company is clearly trading at a significant discount to fair value. Therefore I
recommend a small position BUY for WU.
Sources
 Bloomberg terminal
 www.sec.com/edgar
 www.morningstar.com
 www.finance.yahoo.com
 www.valueline.com
 www.westernunion.com