One of the safest ways to invest in today’s volatile markets is to select companies whose products or services will remain in demand even if the global economy takes a downturn, which I sincerely hope it doesn’t!
The money transfer business…
Remittance is one such basic service which people need to use to get their personal and professional lives moving. There are immigrants working in the developed countries who need to send money to their family back home and business houses which need to make and receive payments across countries to keep their businesses running. The global remittance flows increased 10.77% in 2012 to reach $514 billion and is estimated to reach $608 billion 2015.
The Western Union Company (NYSE:WU) is literally the grand daddy of the remittance industry moving money for over more than 160 years, having a market share of 15% with a network of over 500,000 agent locations spread across 200 countries and counting!
A weak 2012 for Western Union
2012 saw the company losing its exclusive relationship with its Mexican partner Grupo Elektra to its competitor Moneygram International Inc (NASDAQ:MGI), and the loss of over 7,000 agents due to compliance issues in the country.
Moneygram International Inc (NASDAQ:MGI) charges lesser fees than The Western Union Company (NYSE:WU) to strengthen its foothold and steal market share from the giant. Thus Western Union had to decrease its prices to retain market share thereby reducing the earnings estimate for the year as its operating margin is expected to fall to 20% from 24%. All of the above factors led to the stock taking a beating last year. Do these headwinds open opportunities for long-term investors to get the stock at a bargain price or are there tougher times ahead?
Western Union’s robust financials…
| Western Union | MoneyGram International | |
|---|---|---|
| Market Cap | 9.24 Billion | 1.24 Billion |
| Forward P/E | 10.43 | 14.49 |
| Revenue | 5.60 Billion | 1.34 Billion |
| Operating Income | 1.30 Billion | 60.77 Million |
| Operating Margin | 23.2% | 3.9% |
| Free Cash Flow(FCF) | 880.2 Million | -116 Million |
| EBITDA Margin | 27.85% | 7.91% |
| FCF Margin | 15.71% | – |
| P/FCF | 10.5 | – |
| Return on Invested Capital | 17.81% | – |
| Dividend Yield | 3% | – |
Western Union’s impeccable cash generating power
The Western Union Company (NYSE:WU)’s cash flow is a reason unto itself as to why it’s a great investment. Its cash flow has been around $1 billion for the past few years and is expected to be around $900 million this year. The FCF margin points out the remarkable cash generating power of the company. Investors currently earn a dividend of $0.50 for a dividend yield of 3%. With a payout ratio under 30% there is plenty of room to grow the dividend. Apart from the enticing dividend, the company has had a consistent buy-back policy and now plans to reduce $750 million worth of shares which will further decrease the payout ratio and increase EPS.
Return on Invested Capital of over 17% depicts the sound business model of the company and why it makes a great long-term investment!
Western Union’s economic moat
Yes online transfers are the trend today, but only where you can use the internet and have a bank account! Only 41% of the adults in the developing world have a bank account, and internet is still an alien world to most people in the developing parts of the world. The Western Union Company (NYSE:WU)’s extensive network of over 500,000 agents spread across 200 countries over Moneygram International Inc (NASDAQ:MGI)’s 321,000 locations gives it the competitive advantage to serve this under-served population better. With its scale Western Union can lower fees to retain market share as it did successfully in 2009 and is attempting this year again. No wonder it processes four times the transaction of MoneyGram International.
