The Western Union Company (WU), Moneygram International Inc (MGI): Making Money in the Money-Transfer Business

The Western Union Company (NYSE:WU)’s EBITDA margin is 4 times that of Moneygram International Inc (NASDAQ:MGI) stating how much more profitable the company is than its competitor. Seeing the above comparisons, it is clear that Western Union should trade at a higher valuation but that’s not the case. Its forward P/E is far lower than Moneygram International’s and the low P/FCF ratio is another evidence of the company’s undervaluation. Seeing the above comparisons, Western Union becomes the clear choice for a steady growth and income play.

Online service providers stealing market share…but Western Union keeping up…

The new kid on the block: Xoom Corp (NASDAQ:XOOM), an online money transfer service provider, has gained a lot of attention since its IPO was launched this February as the Internet is increasingly more utilized for active financial management. Since online businesses do not require physical locations, this saves up a lot of cost which enables them to offer services at cheaper prices and steal market share.

To keep up with changing times, even Western Union has forayed into the digital world and its digital business is going pretty strong growing at nearly 50% per year and management expects online revenue to reach $500 million by 2015. So this progress must cast side any worries regarding competition from Internet companies!

XOOM not a safe bet…

Th first quarter of 2013 was positive for Xoom, with revenues increasing 43% to $24.3 million and GAAP net loss decreasing 84% to $79,000 this year. This might seem attractive but to put things into perspective, Xoom Corp (NASDAQ:XOOM)’s revenue is just 7% and 1.56% of Moneygram International Inc (NASDAQ:MGI) and Western Union’s revenue, respectively. But its P/S ratio is 8.37, way higher than 0.88 for Moneygram International and 1.63 for Western Union. Xoom has just started out, and it will take a long time for it to reach the scale of its peers and become consistently profitable, thus I think its valuations are a bit expensive at this point in time.

Foolish final

Western Union is highly misunderstood as a company which has led to the massive fall of its price last year just because of a few short term headwinds. The company has a very strong balance sheet and unarguably the largest network. It can thus use its muscle to tackle the short-term headwinds hurled at it by its competitors or the advancing technology. Management believes that 2013 is a transitional year for the company and growth should resume 2014 onwards. Because of the present headwinds its potential is not reflected in the stock price, therefore getting into the stock now might generate pretty hefty returns through the next 5 years.

Tushar Agarwal has no position in any stocks mentioned. The Motley Fool recommends Western Union.

The article Making Money in the Money-Transfer Business originally appeared on Fool.com and is written by Tushar Agarwal.

Tushar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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