Recently Pat McKeough received a request from a Member of his Inner Circleabout a well-known stock facing stiff competition. Beginning as a transcontinental telegraph company in the middle of the 19th century, Western Union now specializes in money transfers.
In recent years, the company’s revenue has declined with more companies entering the field, and the higher U.S. dollar lowering the contribution of its international operations. Now the company is moving into digital transfers, and Pat notes that this has helped reverse its decline in revenue and could develop into a positive trend for the stock.
Q: Pat: As a long-time Inner Circle member, I have enjoyed and benefitted from your precise opinion and ideas on all financial matters over the years. Many thanks. As I am now contemplating selling Western Union, because everybody seems to be facilitating money transfers, I wonder if you agree with me that this company’s future is now limited.
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A: WESTERN UNION CO. (symbol WU on New York; www.westernunion.com) offers global money transfer services through more than 510,000 agent locations in over 200 countries.
Western Union gets about 80% its revenue from the fees it charges its retail customers to transfer money around the world. Business customers receiving more complex services, including currency management, hedging and bill payments, contribute the balance of the revenue.
Over the five years from 2012 to 2016, the company’s revenue declined from $5.7 billion to $5.4 billion. Earnings dropped from $1.1 billion, or $1.74 a share, in 2012, to $824.2 million, or $1.66 a share, in 2016. Those declines came mostly from increased competition that has put pressure on fees and a rising U.S. dollar that has hurt the contribution of Western Union’s international operations.
In the most recent quarter ended September 30, 2017, revenue rose to $1.40 billion, up 2.0% from $1.38 billion, a year earlier. Earnings rose 8.6%, to $235.6 million from $216.9 million. Earnings per share rose 13.3%, to $0.51 from $0.45, on fewer shares outstanding.
Growth stocks: 16% of revenue coming through electronic channels
Western ended the quarter with cash of $1.0 billion, or $2.25 a share. Its debt of $3.5 billion represents a manageable 38.9% of its market cap.
The stock now trades at just 11.0 times its forecast 2018 earnings of $1.79 a share. The company has increased its dividend every year since it started making those payments in 2006. The shares yield 3.6%.
The company still gets most of its business from physical money transfers, but it’s moving steadily into digital money transfers, through electronic channels such as westernunion.com and mobile money transfers. This contributed 16% of the company’s total revenue in the latest quarter, up from just under 6% in 2014. That growth should more than offset ongoing declines at Western Union’s physical locations.
The success of its digital expansion has contributed to its stronger results. If that trend continues, its earnings growth could resume. If earnings rise at Western Union, the stock’s P/E ratio may expand as well. That combination could set off a new long-term rise in the stock.
Inner Circle recommendation: Given the prospects of a long-term rise, Western Union is okay to hold.
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