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Western Union Co. (WU - Analyst Report) reported third quarter 2012 operating earning of 45 cents per share, in line with the Zacks Consensus Estimate. Earnings compared favorably with 40 cents reported in the year-ago quarter.

The company reported revenue of $1.42 billion, up only 1% year over year. Total expenses in the quarter inched up 1% from the prior-year period to $1.1 billion.

In the Consumer-to-Consumer segment, reported revenue decreased 4% year over year to $1.15 billion. The segment suffered from softer economic conditions in Southern Europe and from slowdown in the U.S.

Business Solutions reported revenue of $95 million in the quarter, which increased 2.75 times from $34 million in the year-ago quarter. On a pro forma basis, including Travelex results in the prior year, Business Solutions' constant currency revenue was flat year over year. The business was adversely affected by slowing global trade and high growth comparisons with the third quarter of 2011, when Western Union Business Solutions revenue surged 31%.

Electronic Channel’s revenue, which includes digital and account-based money transfer through banks, jumped 25% in the quarter. Electronic Channels represent 4% of the total company revenue, up from 3% in the year-ago quarter.

The company’s cash flows generation remains strong, and this has enabled it to approve a 25% increase in dividend to 50 cents per share annually, and a new $550 million share repurchase authorization.

Outlook

The company expects GAAP EPS in a range of $1.60 to $1.63, compared to the previous outlook of $1.68 to $1.72. EPS excluding TGBP integration expenses is expected to be in a range of $1.65 to $1.68, compared to the previous outlook of $1.73 to $1.77; constant currency revenue growth in a range of +4% to +5%, including a +4% benefit from the full year inclusion of TGBP. GAAP revenue growth is expected to be in the range of 2%-3%.  Operating margin is anticipated to be approximately 24.5%, excluding TGBP integration costs. The Company’s previous outlook was approximately 25.5%.

Our Take

Western Union has taken a series of strategic growth steps. These include improving customer value proposition, growing digital channel and implementing productivity and cost saving initiatives.

Although the strategic actions are expected to negatively affect the short-term results in 2013, it will position the company for long-term revenue and profitability growth in the current environment. These strategic actions will result in a return to revenue and profit growth beginning 2014.

We remain confident in the long-term opportunities of the businesses of the company. Western Union is a leader in a growing market with a strong global brand, a large and growing agent network, a global organization with best payment capabilities and a local market expertise.

Western Union currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term ‘Neutral’ recommendation on its shares. Peer MoneyGram International Inc. (MGI - Analyst Report) is scheduled to release its earnings on November 5, 2012.
 

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