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WU Downgraded on Weak Outlook

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We are downgrading our recommendation on the shares of  Western Union Co. (WU - Free Report) to ‘Underperform’ from ‘Neutral’ following the company’s third-quarter earnings release, in which it trimmed the full year 2012 earnings expectations. The company slashed its earnings guidance to a range of $1.60–$1.63 per share from a previous estimate of $1.68–$1.72 per share. Moreover, a stiff competition and weak global economy is taking a toll on the company performances. 

Western Unionis facing compliance-related issues, particularly those connected to its Southwest Border agreement. The biggest impact from compliance-related changes has been in Mexico and Latin America. In Mexico, overall revenue decreased over 20% during the quarter, due to declines in our Vigo and Orlandi Valuta brands.

Western Union ended its relationships with over 7,000 Vigo agent locations that could not meet the new compliance requirements. The company has also experienced operational challenges from related system implementations for its Vigo brand in Latin America.

Western Union has also recently witnessed challenges in its core retail money transfer business in certain key markets. It has reduced prices in the face of rigid competition in those corridors. These actions have negatively impacted its revenues in some markets, while at the same time these increased its operating expense.

The company is also facing strong competition from electronic channels of money transfer. Though the company is aggressively expanding its electronic channel at present, it has relatively smaller presence in this segment.

The effect of soft global economic condition was seen in Western Union’s revenue, which increased by a mere 1% year over year. The company’s retail money transfer business was also impacted by compliance-related changes in a number of markets and competitive pricing pressures in certain corridors.

On the other hand, Western Union is also facing management issues. The president of Global Consumer Financial Services along with Stewart Stockdale has left the company. The company is also planning to reduce its overall headcount as well as migrate and consolidate positions from various facilities.

Given a host of headwinds, we expect the stock to remain under pressure in the near term. However, the company’s strong brand name along with the sturdy financial position will help it overcome the hurdles over the long term.

Western Union currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Peer Moneygram International Inc. (MGI - Free Report) , also currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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