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Western Union Grows On Digital Drive & Solid Balance Sheet

Published 02/19/2018, 11:29 PM
Updated 07/09/2023, 06:31 AM

The Western Union Co. (NYSE:WU) seems poised for long-term growth on the back of its steady investment in digital platform, which has been yielding strong returns. Numerous alliances, pacts and deal renewals have also broadened the company’s network in the United States as well as across the globe.

The company’s fourth-quarter earnings were driven by its revenue growth in digital business. On this front, westernunion.com money transfer revenues increased 22% in the quarter, representing 10% of overall consumer-to-consumer revenues. The segment should further witness growth through westernunion.com’s expansion in the core countries, enhanced mobile services and digital partnerships plus thriving products and services. Additionally, stable pricing and moderating foreign exchange headwinds should contribute to this upside.

As one of the world’s leading money remittance companies, Western Union has been making business transformation under its initiative of WU Way. It successfully rolled out this initiative and achieved $25 million of savings in 2017.

The company generates solid free cash flow and boasts a stable track record of returning capital to shareholders via share buybacks and dividend payments. In February, the company increased its quarterly dividend by 9% with the current yield being 3.6%, way higher than its industry’s 0.6%.

The company’s return on equity (ROE) of 206.8% remains ahead of the industry’s 35.6%, reflecting is tactical efficiency in using its shareholders’ funds. Moreover, the company’s ROE has grown steadily since 2014.

Nevertheless, Western Union expects weakness in its US domestic manufacturing business, accounting for 7% of the company’s total revenues in 2017. The business has been experiencing a drag in its transaction trends since the second half of last year and is likely to have been affected by free peer-to-peer services in the market to an extent. The company expects a subdued performance from this part of the business.

Western Union is also facing severe competitive pressure from the recent acquisition of Xoom by PayPal Holdings, Inc. (NASDAQ:PYPL) . Notably, the companies enjoy a significant presence in the digital money transfer market with the acquirer fast catching up via intensive investments. Also, there are high chances of a merger between MoneyGram International Inc. (NASDAQ:MGI) and Euronet Worldwide, Inc. (NASDAQ:EEFT) (after a failed merger attempt by MoneyGram with Ant Financial). Western Union has always commanded premium pricing in the market by virtue of its brand name, reliability and near monopoly in the market. But industry consolidation might pose some stiff competitive challenges to the company.

Share Price Performance

In the last six months, shares of the company have returned 7.3% compared with the industry’s rally of 19.5%. Despite this underperformance, we believe the stock has enough room to grow, given its favorable 2018 guidance and strong fundamentals.

The stock’s lower-than-market positioning (currently trading at a forward 12-month price-to-earnings (P/E) ratio of 11, which compares with a five-year trading range of 9.6-13.9 and is lower than the industry P/E ratio of 24.3) further makes it an attractive buy. Moreover, the stock carries an impressive Value Score of A.

Western Union carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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PayPal Holdings, Inc. (PYPL): Free Stock Analysis Report

Moneygram International, Inc. (MGI): Free Stock Analysis Report

Euronet Worldwide, Inc. (EEFT): Free Stock Analysis Report

Western Union Company (The) (WU): Free Stock Analysis Report

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