Western Union Stays Neutral

Western Union Co. (WU - Analyst Report) adopted several strategic initiatives during the recent years to generate long-term growth. However, growing competitive pressure from other cheaper money transfer options may erode the company’s premium pricing, thus pressurizing the bottom line. We thus retain our Neutral recommendation on the company.

Western Union’s key business, Consumer-to-Consumer has been witnessing growth for the past several years except in 2009, when the economic crisis had an adverse effect on the company’s growth prospects. We believe that this business segment will continue to benefit as worldwide immigration is expected to increase.

According to the World Bank, remittance volume is expected to grow exponentially in the coming years. Western Union is expected to greatly benefit from the rapid growth in the money transfer market, given its size and scale.

The recent acquisition of Travelex, augmenting the Business Solutions division, is also expected to be accretive to the company’s earnings.

Also, Western Union’s international expansion is expected to fuel long-term growth. The company is eyeing under-penetrated and underserved markets around the globe. Given a superior brand value and reputation, the company faces lower competition outside the U.S. We expect a growing share of revenue from these markets going forward.

Western Union’s wide agent network has grown rapidly over the past few years, enhancing its global presence. The company expects to achieve 1 million agent locations worldwide. We believe that this ongoing investment in the brand and new agent appointments reflect the company’s confidence in its market position.

The company’s investment in alternative modes of money transfer like WesternUnion.com, account-to-cash, mobile, and prepaid are also gaining traction. Though these new age offerings were an apparent threat to Western Union’s traditional agent network distribution system, the company managed to execute them successfully.

This line of business represented 3% of the total company revenues for fiscal 2011 and grew 38% year over year in the first quarter of 2012, adding more than $100 million to the company’s combined revenues.

Management aims to generate $500 million of revenue from this channel by 2015. As part of the digital initiative, management expects to invest $35 million with additional capital expenditures in 2012.

Nevertheless, Western Union is facing increasing competition from multinational banks, which offer a variety of services apart from remittance. Moreover, mobile payment services offered by Paypal and Xoom are gaining increased acceptance. They also offer their services at comparatively lower rates, which poses a stiff competition for Western Union’s premium pricing.

The company will thus have to continue investing in online and mobile funds transfer services, as these are becoming increasingly popular. The company’s operating model will then undergo change, which might put margins under pressure.

The company is also expected to see sluggish demand for remittance as problems in the EuroZone continue. A weak overall global scenario will also act as a macro economic headwind.

However, business restructuring recently undertaken by the company is also expected to lead to cost savings. A strong balance sheet along with shareholder-friendly capital management makes the stock all the more attractive to the investors.

Western Union retains a Zacks # 3 Rank, which translates into a short-term Hold rating.

Close peer MoneyGram International Inc. (MGI - Analyst Report) also retains a Zacks #3 Rank, which translates into a short-term Hold rating. The stock also carries a long-term Neutral recommendation.