1). The money transfer business is scalable, with minimal incremental costs of processing additional transactions, giving Western Union a competitive advantage, with operating margins about twice that of its closest competitors.
2). Western Union has over 500,000 agents globally - nearly double the 260,000 of its closest competitor Moneygram International Inc (NYSE:MGI), but it processes about 3 times the transactions and sports revenue nearly 4 times that of Moneygram2). Allowing growth while preserving pricing power: At the same time, it has the opportunity to grow via both increased market share and expansion into new markets:
1). With less than 20% market share, Western Union has opportunity to grow as the industry consolidates. Further, opportunities to expand in new markets especially the Asia-Pacific region (20% of the global money transfer market, but only 12% of WU revenue). The Company's recent foray into pre-paid cards should also provide significant growth opportunities playing to its strength of wide distribution.3). Demonstrated in Strong Financials: with free cash flows being 15 – 20% of revenue and RoIC in excess of 25%.
1). Network effect is amongst the strongest and most sustainable of all economic moats, resulting in strong free cash flows and RoIC. Examples include Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA) and more recently Facebook Inc (NASDAQ:FB).
2). While free cash flows as % of Sales of >5% and RoIC > 10% maybe considered as demonstrating strong financials - all 3 companies are comfortably in the top quadrant on both metrics!
|Company||Ticker||Free cash flow as % Sales||RoIC|
|Western Union||WU||15 – 20%||20 – 25%|
|Visa||V||>40%||10 – 12%|
1). Long term industry outlook remains positive, as money transfer by immigrants are typically not discretionary spending. Also, increased regulatory requirements driving out smaller players.5). Providing excellent long term buying opportunity: Western Union currently trades at a substantial discount based on both (a.) intrinsic and (b.) relative valuation. This compared to both direct competitors, such as MoneyGram, as well as other companies with wide network advantages, e.g Visa and Mastercard.
1). Based on Morninstar analysis – WU currently trades at 55% of its fair value (vs. 75% for MGI and 120% for both V and MA).
2). Similarly it trades at a forward PE of 7.0x, PEG ratio of 1.0 and PEG payback of 5.0 years (vs. PE in excess of 15x and payback in excess of 7 years for MGI, V and MA)