Should You Buy Western Union After the Drop?

The Western Union Company (NYSE:WU)’s stock price fell 29% on October 31st after the company’s third quarter results disappointed the market. While earnings per share came in slightly above what analysts had been expecting, revenue figures were essentially flat compared to both the third quarter of 2011 and the second quarter of this year (and missed the Street’s target). The earnings beat was driven by non-operating factors including a lower effective tax rate and the lack of losses on derivative transactions. A 4% reduction in share count brought earnings per share up to 45 cents. Western Union also reduced its guidance for the fiscal year.

The Western Union Company doesn’t look like such a bad value on a quantitative basis now that its share price has come down. It trades at a P/E of 7 regardless of using trailing earnings, an annualization of the third quarter, or forward estimates in the denominator. We’d generally consider that to be value territory for a stock, particularly one which isn’t seeing a decline in earnings and isn’t tied to prices of a specific commodity. The concern with Western Union is that it will be crowded out of the marketplace by competing money transfer companies. Paypal, which is a business unit of eBay Inc (NASDAQ:EBAY) and Moneygram International Inc (NYSE:MGI) are the two most obvious competitors, with eBay’s business reportedly picking up recently; American Express Company (NYSE:AXP) also operates money transfer services, and Bank of America Corp (NYSE:BAC) is moving into peer-to-peer money transfers as well. To the degree that these services are more efficient (in that some might not require a physical presence) or offer lower fees, they could chip away at Western Union’s business.

OMEGA ADVISORS

At the end of June, John Shapiro’s Chieftain Capital owned 8.4 million shares of The Western Union Company; the stock was one of only ten positions reported in the fund’s 13F portfolio (see the rest of the stocks that Chieftain owned). Omega Advisors, managed by billionaire Leon Cooperman, nearly tripled its own stake over the course of the second quarter to a total of 4.3 million shares (find more stock picks from Leon Cooperman). Also buying the stock was Bernard Horn’s Polaris Capital Management; Polaris had not owned any shares of Western Union at the beginning of April but had bought 2.1 million shares three months later.

Moneygram is likely the closest peer. At a market cap of about $910 million- considerably smaller than Western Union’s $7.7 billion- it trades at 12 times forward earnings estimates. Its revenue grew slowly in the second quarter versus a year earlier, and given its smaller size as well we don’t think that it merits such a high premium relative to Western Union.

eBay, at 18 times consensus earnings for 2013, is the priciest but it also has the highest growth rate of these five companies; in the third quarter, revenue was up 15% and earnings were up 22% compared to Q3 of last year. It could be a good “growth at a reasonable price” stock. Over the same period, American Express’s business was about flat (whether looking at revenue or earnings) while Bank of America’s net income dropped 95%. At a forward P/E of 10, we still think that it’s time to take profits at Bank of America. American Express is priced a bit higher- it carries trailing and forward P/Es of 13 and 12, respectively- but those look like good prices for a value stock and the company has a very strong credit card brand.

We think that American Express is priced attractively for its earnings, current business conditions, and brand. However, the price drop at Western Union has left it at a substantial discount (both to that company and to Moneygram) and we think that it is now a buying opportunity. A pair trade with Moneygram would be one possibility to reduce risk.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!