Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Moneygram International Inc (MGI), Xoom Corp (XOOM): Here’s Why The Western Union Company (WU) Is a Good Buy Right Now

Move over, paper checks and bank wires. A new way to send money from place to place is catching on in a big way.

Meet the online money transfer, a new product that will revolutionize the industry of sending cash from point to point. Three emerging services from three very different providers — The Western Union Company (NYSE:WU)Moneygram International Inc (NASDAQ:MGI), and Xoom Corp (NASDAQ:XOOM) — offer a convenient, inexpensive way to send cash to any country you please.

Money at the speed of light

The Western Union Company (NYSE:WU)Once, The Western Union Company (NYSE:WU) was the only game in town — you had to use its service to send instant cash around the world.

But The Western Union Company (NYSE:WU) became too comfortable in its market-leading position. It lost exclusive contracts with agents in Mexico and failed to cut prices to thwart competitors elsewhere around the world. Industry rivals Xoom Corp (NASDAQ:XOOM) and Moneygram International Inc (NASDAQ:MGI) capitalized on that weakness, working on deals to steal key corridors by driving down prices.

Prices for money transfers to Mexico felt the biggest impact from these moves. Here’s how the three players compete for business south of America’s borders:

Service MoneyGram Western Union Xoom
Instant cash $7 for debit/credit $7 for debit/credit $12.99 debit/credit or $4.99 via bank account
1-3 day delayed transfer $4 paid by bank account $0 paid by bank account $4.99 via bank account

In a commodity business like money transfer, customers choose a service based on price. Xoom Corp (NASDAQ:XOOM)’s position as the lowest-cost instant transfer service has rewarded the firm with outsized revenue growth. In just the past year, fast-acting Xoom grew revenue by 59%, compared to The Western Union Company (NYSE:WU)’s 33% online growth and Moneygram International Inc (NASDAQ:MGI)’s 15% growth.

Is this the end of Western Union?

Smart investors know competition drives down prices. It also drives down profits. The Western Union Company (NYSE:WU) reported that operating margin fell to 20% from 23% as it lowered prices to remain competitive.

This isn’t the end of Western Union, however. Remember, this company survived the death of the telegraph, so disruptive technology is nothing new for it.

Western Union still has major competitive advantages. Its network includes 500,000 agents, compared to 300,000 for Moneygram International Inc (NASDAQ:MGI), and no offline sales network for Xoom Corp (NASDAQ:XOOM). In addition, the company excels in two-way money transfers. Xoom can only offer transfers from the United States to foreign lands — it doesn’t offer money transfer between the states, or into the United States from abroad.

Why Western Union is a top pick

Fast-moving companies may steal the show, but as investors, we have to worry about the profits. Western Union’s ability to turn revenue into cash is unmatched — it turns $0.17 of every dollar in revenue into pure free cash flow. Moneygram International Inc (NASDAQ:MGI) turns roughly 14% of revenue into free cash, while Xoom Corp (NASDAQ:XOOM) hasn’t posted a dime in cash flow generation.

Western Union generated an average of $1 billion in free cash flow in each of the last five years. Upstart Xoom only recently recorded its first quarterly profit, and it trades at 75 times annualized earnings. MoneyGram trades for 17 times forward earnings on news that it is actively engaged in going private.

Western Union deserves a higher valuation. At 10 times earnings and free cash flow, and with a competitive advantage in offline money transfer, I believe it can continue to compete offline while growing its online business at a 30%+ annual clip.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.