Will Western Union Gain From Business Sale, Share Buyback?

Last week, Western Union Co. (NYSE:WU) signed an agreement for the sale of its Speedpay business to ACI Worldwide.

The deal would fetch the company $750 million in cash and is expected to be completed by the end of the second quarter of 2019, subject to customary closing conditions and regulatory approvals.

Simultaneously, this leader in money remittance space announced a new three-year share repurchase authorization of $1 billion, set to expire on Dec 31, 2021, and is accretive to worth $544 million remaining under its previous buyback plan as of Dec 31, 2018.

Focus on Core Areas

Western Union’s bill pay business accounted for nearly 6% of the company’s 2018 total revenues, providing electronic bill presentment and payment solutions to a variety of business sectors in the United States including utilities, auto finance, mortgage, consumer finance, insurance, telecommunications and government finance. Revenues for this business declined in 2018, due to a decrease in Western Union’s United States electronic bill payments services.

The divestiture will thus allow Western Union to concentrate on its focal point of cross-border money transfer. The company seeks to expand its digital services, thereby leveraging its platform to unlock new cross-border, cross-currency payments opportunities and generate additional operating efficiencies.

Western Union expects this deal to lead to a pre-tax gain of approximately $500 million. Net proceeds of the transaction, after taxes on the gain, are projected to be approximately $575 million and the company intends to use the same to return capital to shareholders as well as manage its capital structure.

Per the recent guidance, the company expects revenue growth in low single digit (on a constant currency basis), operating margin of approximately 20%, EPS in the range of $1.83-$1.95 and cash flow from operating activities of approximately $1 billion. However, following the closure of this deal, the company is likely to revise its earnings outlook. The company, however, does not anticipate the divestment to affect its 2019 operating margin view of approximately 20%.

This business streamlining and share buyback should help the company’s both top and the bottom line, thereby aiding overall growth.

Will These Developments Favor Western Union?

The stock has been under pressure of late after experiencing a stiff competition from the entry of numerous fintech players in the industry. While the company’s business was mostly physical, involving stores and agents operating those, the fintech players with their cutting edge technology were able to eat into its market share.

Though Western Union has been investing heavily in developing its technology platform to face the tough rivalry and has been able to grow its digital business, all this has induced an increase in expenses, which has weighed on its margins as well as earnings.

Consequently, the stock has lost 8% of value in a years’ time versus the industry’s growth of 16%.

Another stock from the same space, MoneyGram International Inc. (NASDAQ:MGI) , has been battered hard from the intensifying competition and rising expenses. As a result, it has plummeted 77% in a year’s time.

Zacks Rank & Stocks to Consider

Western Union carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Global Payments Inc. (NYSE:GPN) with a Zacks Rank #2 (Buy) and Fidelity National Information Services, Inc. (NYSE:FIS) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Both Fidelity Information and Global Payments surpassed respective earnings estimates in each of the last four reported quarters, the average being 2.7% and 3.26%, respectively.

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