Peer comparison
The Western Union Company (NYSE:WU) is the global market leader in money-transfer services. Unlike Xoom, which is solely focused on the consumer-to-consumer business, The Western Union Company (NYSE:WU) has a consumer-to-business segment. The consumer-to-business segment, providing bill payment services for mortgages and car loans, and its business-to-business segment, offering cross-border payment services for businesses, accounted for about 11% and 6%, respectively, of its fiscal 2012 revenue.
These two business segments are much more economically sensitive than its bread-and-butter consumer-to-consumer transfer services. Another issue with Western Union is its high financial risk, with a gearing of 406%. In contrast, Xoom and Moneygram International Inc (NASDAQ:MGI) have net-cash financial positions. Going forward, management guided for a low single-digit decline in full-year 2013 revenue on the back of weak transaction growth and pricing cuts.
Moneygram International Inc (NASDAQ:MGI) is Western Union’s closest competitor, as the second-largest money transfer company in the world. Moneygram International Inc (NASDAQ:MGI) grew its quarterly money transfer revenue and transaction volume by 10% and 11%, respectively, for the first quarter of fiscal 2013. Management estimated fiscal 2013 year-on-year revenue growth to be in the range of 6% to 9%. However, Moneygram International Inc (NASDAQ:MGI) has an inferior agent network in terms of the number of physical locations and a lower volume of customer dollars processed, compared with Western Union. This suggests that Moneygram International Inc (NASDAQ:MGI) has a weaker network effect than Western Union, as its agents earn less commission with a lower transaction volume and its customers have access to fewer locations to transfer cash.
However, disruptors like Xoom are expected to take more market share from traditional money-transfer providers as more people get comfortable with online money transfers and either open a bank account or apply for a credit card.
Conclusion
Xoom is my preferred money transfer provider of choice as an investment candidate for its attractive pricing and cost efficiency. While Xoom is valued at a premium to its peers with an enterprise value/revenue of 8.8, I think this is justified given its superior growth prospects.
The article This Company’s Affordable Services Bring a Smile to Investors originally appeared on Fool.com is written by Mark Lin.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Western Union. Mark 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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