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Western Union: Now Comes A Growth Strategy

Carla Fried

Stocks currently sell at a 2% premium to their fair market value according to Morningstar’s proprietary calculations. As with all averages there are always interesting divergences to consider. Case in point: Western Union (WU) which sells at a 26% discount to Morningstar’s estimate of its fair value. Moreover, Western Union rates a “wide moat” from Morningstar, and is currently one of the 20 holdings in the index-beating Market Vectors Wide Moat ETF (MOAT) which tracks Morningstar’s index of wide moat stocks.

(Full Disclosure: Morningstar is an investor in YCharts.)

To sell at a steep discount in a market that isn’t universally cheap is a signal there’s a mitigating factor or two to consider. As YCharts’ Dee Gill explained this past spring, Western Union had a troubling earnings miss last October and conceded that 2013 was going to be a revenue and profit slog as it righted its ship through cost-cutting and an intensified push in digital apps.

Still, the late October sell off that sank Western Union’s share price by one-third was clearly an overshoot, as the stock has retraced its way back to its pre-fall level, as seen in a stock chart, defying a pick-up in short interest that has only recently started to recede:

WU Chart

NYSE:WU data by YCharts

As shown in a chart, Western Union is indeed still a work in progress. While revenue has managed to rise, diluted earnings-per-share hasn’t, a function of Western Union reducing its consumer-to-consumer prices to hold onto market share. Meanwhile operating margin and EBITDA margin have nosedived.

WU EPS Diluted TTM Chart

WU EPS Diluted TTM data by YCharts

Management did warn that 2013 wouldn’t be pretty; those downward trend lines go a long way to explaining the 25% discount to fair. But two new deals announced this week could be a boost to 2014 results.

Western Union has been operating in China—it enabled transfers into China from 197 countries in 2012. Total revenue from Asia Pacific consumer-to-consumer transactions accounted for 12% of company sales in the second quarter. That is likely to rise going forward. A new deal with China ‘s leading bankcard association will now enable direct transfers from 23 countries into Chinese bank accounts; Western Union estimates the reach is into more than 95% of personal bank accounts in China. The transfers can come from Western Union retail outlets as well as through the firm’s online transfer service. A companion deal with Industrial and Commercial Bank China will also allow direct account-based transfers from more than 200 countries into the bank’s accounts via online transactions.

Wall Street liked the deals. Western Union stock climbed 1.8% on the day of the announcement, nearly 1.5 percentage points ahead of the broad market.

Still, investing today is a bet that management can navigate the turnaround. That said, you’re not exactly paying up these days as the trailing p/e of 12 is about a 25% discount to the market average.

And management seems intent on paying investors for their patience. The dividend increased 25% over the past year, and has more than tripled over the past five years.

But with a payout ratio below 30% there’s still ample room for more increases. For all its headwinds, Western Union remains a pretty nice free-cash flow cow. Management expects to deliver $1 billion in free cash flow this fiscal year.

WU Free Cash Flow TTM Chart

WU Free Cash Flow TTM data by YCharts

The 2.6% current dividend yield has come down this year as the price has recovered. Still, that’s well above the 2% average for the S&P 500.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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