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Will Elevated Expenses Mar Western Union's (WU) Q2 Earnings?

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Western Union Co. (WU - Free Report) is scheduled to report second-quarter 2017 results on Aug 3, after market close.

Last quarter, this money transfer company missed the Zacks Consensus Estimate by 12.5%. The company’s bottom line suffered from the tax impact of changes in the internal ownership structure of some of its international subsidiaries.

The company exceeded estimates in two of the last four quarters, with an average positive surprise of 0.45%. This is depicted in the graph below:

Western Union Company (The) Price and EPS Surprise

Let’s see how things are shaping up for this announcement.

Q2 Flashback

Results will witness overall growth from opportunities that have come along with the company’s expansion into new geographies, increased touch points, and improved functionality.

Western Union’s digital strategy is gathering steam with continued investments in this platform. The company which was non-existent in this space a few years ago has been making massive investments in its digital platform as consumers are increasingly adopting technology, in their everyday lives. Transaction and revenue growth has been consistent from its electronic business and we expect the trend to continue in the to-be reported quarter given a number of digital partnerships and deals forged, which will contribute to transaction volume growth.

On the flip side, continued drag from oil-producing countries in the Middle East, Africa, and South Asia region, the impact of demonetization in India, which reduced inbound transfers to the country, and loss of revenue from XE.com. will weigh on the company’s results.

Also, the bottom line might suffer from elevated compliance spending. Western Union paid 3.6% of revenues in 2016 as compliance charges and 3.7% in the first quarter. Continued investments in developing its digital strategy will also dent margins to some extent.

As the company derives a big portion of its business from across the globe, the impact of forex volatility will likely be felt in the to-be-reported quarter.  The impact of currency translation, net of hedge benefits, impacted first-quarter 2017 revenues by approximately $30 million.

The company has committed to spend approximately $1 million on WU Way (its new business transformation program) in 2017, and these costs, related primarily to the implementation, consulting and severance, will be noted each quarter. Part of this cost will therefore will reflected in the quarter’s results.

Earnings Whispers

Our proven model does not conclusively show that Western Union is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.

Zacks ESP: Western Union has an Earnings ESP of 0.00%. This is because the Most Accurate estimate of 42 cents per share is in line with the Zacks Consensus Estimate.  You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Western Union carries a Zacks Rank #3, which increases the predictive power of ESP. However, the company's 0.00% ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Kellogg Company (K - Free Report) will report second-quarter 2017 earnings results on Aug 3. It has an Earnings ESP of +2.17% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cigna Corp. (CI - Free Report) has an Earnings ESP of +1.61% and a Zacks Rank #2. The company is expected to report second-quarter earnings results on Aug 4.

Financial Engines, Inc. (FNGN - Free Report) has an Earnings ESP of +4.00% and a Zacks Rank #2. The company is expected to report second-quarter earnings results on Aug 8.

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