Famous investors, including Joel Greenblatt, Brian Rogers, and Chuck Royce have accumulated The Western Union Company (NYSE:WU) for their portfolios. Let’s take a closer look to determine whether or not this company is a sweet buy right now.
Western Union – the global leader in global money transfer
The Western Union Company (NYSE:WU) is considered a global leader in money movement and payment services, with the reputation of “speed, reliability, trust and convenience”, having more than 437,000 agent locations in more than 200 countries. The company operates in three main business segments: Consumer-to-Consumer (C2C), Consumer-to-Business (C2B), and Business Solutions.
Most of its revenue, $4.58 billion, or 81% of the total revenue, was generated from the C2C segment. C2B ranked second with only $604 million in 2012 revenue, while the Business Solutions segment contributed $367.4 million in revenue. The C2C segment was also the largest income contributor with nearly $1.27 billion in operating income. Interestingly, this segment is mainly for under-banked people to transfer money back home.
In the first quarter of 2013, its revenue decreased 5% to $1.32 billion. Its transaction fees also experienced a decline of 6% to only $978 million. The decrease in C2C revenue was due to compliance-related charges and pricing investments. C2C transactions rose 2%, thanks to pricing investments in key corridors. Net income came in at $212 million, or $0.37 per share, a bit lower than the net income of $247.3 million, or $0.40 per share in the first quarter last year.
Interestingly, despite the depressing bottom line, its EPS still beat analysts’ estimates of $0.33 per share. The company expects its full year 2013 EPS to be in the range of $1.33 to $1.43 a share. At $16 per share, The Western Union Company (NYSE:WU) is worth $8.95 billion on the market. The market values Western Union at around 6.86 times EV/EBITDA and 1.61 times sales. Compared to its peers Moneygram International Inc (NASDAQ:MGI) and Xoom Corp (NASDAQ:XOOM), The Western Union Company (NYSE:WU) doesn’t seem to have an expensive valuation.
MoneyGram – similar valuation but much lower market share
Moneygram International Inc (NASDAQ:MGI) is the second largest player in the global money transfer and payment service industry with around 310,000 agent locations in 197 countries. Its Money Transfer segment is the biggest revenue contributor, accounting for 85.7% of its total revenue in 2012. Recently, Moneygram International Inc (NASDAQ:MGI) reported sluggish first-quarter earnings results. In Q1 2013, its revenue increased 7% to $340.5 million, lower than analysts’ expectation of $342.6 million. However, Moneygram International Inc (NASDAQ:MGI) produced a net loss of $12.6 million compared to a profit of $10.3 million in the first quarter last year. The net loss in Q1 2013 was due to $45.3 million in debt extinguishment costs.
MoneyGram is trading at nearly $19 per share with a total market cap of around $1.2 billion. The market values MoneyGram quite similarly to Western Union, at 6.86 times EV/EBITDA and only 0.78 times sales. Thus, Western Union seems to be a much better bet with its market leading position in the global money transfer industry. According to Barron’s, Western Union had around 15% of the global market share while Moneygram International Inc (NASDAQ:MGI) owned only 5% of the market.
Xoom – a new player with an expensive valuation
A new player in the sector is Xoom Corp (NASDAQ:XOOM), which focuses mainly on digital C2C international money transfer, operating in 30 countries. Like Western Union and MoneyGram, Xoom Corp (NASDAQ:XOOM) has benefited from the increasing demand for people to send their money home, resulting from the increasing global immigration. In the period 2009-2011, Xoom Corp (NASDAQ:XOOM) has nearly doubled its revenue from $26.3 million to more than $50 million while net loss has dropped from $5.5 million to $4.4 million. Xoom uses little debt in its operations. As of March 2013, it had $146.9 million in equity, $84 million in cash, $51.5 million in short-term investments, and only $25 million in non-current portion of line of credit.
Xoom is trading at $20.50 per share with a total market cap of $676 million. As Xoom Corp (NASDAQ:XOOM) has not generated positive EBITDA, its EBITDA multiple is not valid. Xoom seems to be quite expensively valued at as much as 7.5 times sales, more than 6 times higher than the P/S ratios of both Western Union and MoneyGram.
My Foolish take
Among the three, The Western Union Company (NYSE:WU) is still my favorite stock. Western Union enjoys a leading position with huge economies of scale. Moreover, investors could get a decent dividend yield at 3.20% while Moneygram International Inc (NASDAQ:MGI) and Xoom Corp (NASDAQ:XOOM) do not pay any dividend to shareholders. I personally think Western Union should have higher valuation than MoneyGram. If an EV multiple of 9 is used, Western Union could be worth more than $21 per share.
The article This Global Money Transfer Leader Is Really a Buy originally appeared on Fool.com and is written by Anh Hoang.
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