When Western Union Co. (WU) was founded in the mid-19th century, the “Western” referred to the most distant reaches of the U.S. telegraph system at the time, in the Mississippi Valley. Today the company operates in 200 countries and territories – every nation, in fact, but North Korea and Iran.
And while Western Union no longer handles singing telegrams, its unique network of half-a-million money-transfer agents allows customers to send cash whistling virtually anywhere on the globe, from Times Square to a remote Asian village.
Western Union has been listed on the New York Stock Exchange since 1865; it developed the first successful stock ticker in 1869 and, in 1884, became one of the original 11 members of the Dow Jones Industrial Average. It's now a company that helps knit together the 21st-century global economy, with its ever-deepening cross-border economic interconnections and unprecedented mobility of labor and goods.
But neither Western Union’s pedigree, its adaptations over the decades, nor its industry-leading franchise has persuaded Wall Street skeptics the company can thrive going forward. The biggest knock on the business is that the spread of smartphones and mobile-payment technology will render the in-person wiring of cash obsolete – or will at least lead to its long-term decline.
Yet while Western Union is participating in the digital-payments and money-transfer wave via WU.com, prepaid cards and a phone app (and has even considered accepting Bitcoin), it remains tricky to send money person-to-person given divergent wireless networks across the world. This insulates the fundamental cash-transfer business from serious peril.
The core Western Union customer is “unbanked” or “underbanked,” with little access to mainstream checking accounts. The user, often a migrant who moved seeking work, is typically paid in cash and has a relative waiting to receive funds for almost immediate use. The company estimates that 60% of its customers send home more than 40% of what they earn. No bank has a global branch network approaching the span of WU, and banks don’t make it easy or inexpensive to shuttle cash across oceans.
While the money-transfer industry has been criticized for high fees, its pricing and charges for foreign-exchange are clearly disclosed and competitive with its peers. The company has also been targeted in money-laundering and illegal-immigration crackdowns in various states, though its beefed-up regulatory compliance efforts have lessened these pressures.
Crossing the border
There are only a handful of very large “remittance corridors” in the world, or country pairs between which a large volume of remittances flow. The World Bank estimates global remittances will grow around 7% this year to more than $550 billion, not counting “informal” money movement such as cash carried across.
The U.S.-to-Mexico is the largest at more than $20 billion, though India and China are by far the chief recipients of migrants’ cash, at more than $60 billion each in total from “sender” countries including the U.S., Saudi Arabia, Hong Kong and United Arab Emirates. And most of the places that receive a heavy flow of migrant funds remain largely cash-based economies. Western Union typically shares the commission for money transfers with the agents at either end.
Western Union handled some $73 billion worth of such cross-border remittances, more than three times the volume of its nearest U.S. rival, Moneygram International Inc. (MGI).
Hikmet Ersek, CEO since 2010, casts Western Union’s business as an integral source of empowerment for people of lesser means seeking a better life. While it’s easy to dismiss this as corporate image-burnishing, it’s true that Western Union is something of a lifeline for tens of millions worldwide.
Ersek sometimes makes the message personal, too, as in this article he published last year in the New York Times. The son of a Turkish father and Austrian mother who met in Paris and raised him in Istanbul, he reports sending his father cash weekly via Western Union, to this day. The company frequently makes its network available for donations to relief efforts, and just announced an expanded money-transfer platform specifically for global nonprofit organizations.
Rather than the feared threat of obsolescence through disruptive digital innovations, the main challenges for Western Union have been plain old competition and economic conditions.
While its stock has climbed nicely this year, rising 35% to $18.60, it has merely recovered what it lost on one scary day – Halloween 2012, when it warned of a harsh pricing environment and said 2013 would be a transitional year of promotional prices and double-digit profit declines. On that day the shares dropped 29% to below $13, as these industry pressures were added to abiding concerns over weak U.S. employment trends.
Yet the price measures have been effective. Chief financial officer Scott Scheirman told a Deutsche Bank investment conference this month that transaction volume accelerated in the second quarter as the new price policies took hold, with Western Union-branded volume rising 7%. The ongoing labor-market recovery and the rebound in the home-construction sector, which employs many immigrant workers, have also helped.
Meantime, the digital business is surging (off a modest base), with 68% transaction growth on WU.com. Some 80% of that traffic is from new customers, so cannibalization of the core business has been minimal.
The company has also averaged more than $1 billion in free cash flow annually in recent years, aggressively repurchasing stock to reduce its share count by more than 20% since 2009. It has increased its dividend five times since ’09 to the current 50-cent-per-share annual level, giving the stock a 2.7% yield.
Ersek worried some shareholders in 2011 when he agree to spend $974 million at a rich valuation for Travelex Global Business Payments, which handles cross-border transactions for small and mid-sized businesses. But, while outside the core consumer business, it offers a nice long-term growth opportunity as a play on increasing global trade and outsourcing. It represents about 20% of WU revenues now.
Despite the stock’s strong run in 2013, it remains modestly valued at 13-times projected per-share earnings for this year and 11-times for 2014, when bottom-line growth is set to accelerate after the current “transition year,” a healthy discount to the broad market. And, comfortingly, there remains plenty of skepticism toward the stock, with only four of 29 analysts recommending it and a higher-than-average short position prevailing all year.
Boyar Research, a value-oriented stock analysis and money-management firm, got firmly bullish on the stock in a well-timed call early this year when it was around $14, placing a fair-value estimate of $23.50, up 25% from the current price.
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