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We are reiterating our recommendation on Western Union Co.  (WU - Analyst Report) at ‘Neutral’ prior to its third quarter earnings release scheduled for October 30, 2012. The Zacks Consensus Estimate earnings per share (EPS) is pegged at 45 cents, reflecting an improvement of 12% year over year. 

We are optimistic about the company’s performance going forward, given its long-term growth momentum led by strategic investments in new products, services and technology. However, a rapid growth of other cheaper money transfer options may lead to competitive pressures.

The company is focusing on three main areas – expanding the existing network and retaining as well as adding new customers to the consumer money transfer business; creating a digital infrastructure to drive its electronic channels business; and developing the B2B segment apart from ensuring successful integration of the Travelex business.

Western Union’s key business – Consumer-to-Consumer (accounts for more than four-fifth of total revenues) – has been witnessing growth for the past several years. We believe that this segment will continue to be attractive as worldwide immigration is expected to keep increasing.

Another segment, Business Solutions, is rapidly growing its cross-border payments business for small to medium-sized enterprises. The acquisitions of Custom House and Travelex have spread the segment’s business in many countries.

Western Union’s is aggressively expanding internationally and is eyeing emerging economies of China and India, where the remittance market is still under-penetrated. In Asia, the company has further expanded its network and has approximately 200,000 locations across China, India and the rest of APAC. Given a superior brand value and reputation, the company faces lower competition in these regions compared to the U.S., we expect a growing share of revenue from these markets in the future.

A wide agent network, actively developing electronic channels and prepaid cards are other salient features of the company, which will help it to grow market share going forward.

On the flip side, Western Union’s business is dependent on the global macroeconomic situation, particularly the high levels of unemployment. Since the major economies of the world are facing downturns, the remittance volume may be negatively impacted, causing restricted earnings.

Despite the headwinds, Western Union’s solid balance sheet with good capital management will aid its bottom-line earnings.

Western Union currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Its Peer MoneyGram International Inc. (MGI - Analyst Report) also retains a Zacks #3 Rank. We are also maintaining our long-term Neutral recommendation on its shares.

 

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