Credit rating firm Moody's Investors Service recently affirmed a senior unsecured rating of Baa2 to The Western Union Company WU. This news was followed by the company’s announcement of an agreement to sell its Speedpay domestic billing service business, which is expected to close in the second quarter of 2019. The rating outlook is stable.
The credit rating agency states that Western Union's Baa2 senior unsecured rating reflects its leading position in the emerging money transfer market, a solid operating performance, constant cash flow and a balanced capital allocation strategy. The company enjoys a good reputation for quality services and a solid brand equity along with an extensive compliance infrastructure.
Western Union has also participated in evolving the money transfer market by creating and growing a global digital money transfer business while also expanding its geographies to boost its portfolio. Key rating limitations include Moody's expectation for only flat-to-moderate top-line growth in the near term and a fiercely competitive market.
The credit rating giant expects the company’s financial performance trends to be stable going forward, given its strategic advantages and growth in digital platform as well as stability in cross-country cash movement with regard to the key overseas markets.
However, Moody's also thinks that Western Union’s ability to boost margins will be restricted in the near term by investments made in the digital market, which is aimed to further bolster its strong market position.
Moody’s expects free cash flow around $400 million pro forma for the divestiture of Speedpay. Western Union gains from an impressive liquidity position, evident from its cash balances of about $1 billion as of Dec 31, 2018 along with a solid free cash flow and Speedpay sale proceeds estimated this year.
The credit rating company views the sale of Speedpay to be credit positive as it deepens the company’s portfolio focus on its core strengths in cross-border money transfer.
The stable outlook reflects Moody’s projection for Western Union’s generation of robust revenues and healthy margins in the coming 12 to 18 months and Moody's adjusted leverage will be around 3x.
Factors That Can Drive Future Ratings
There could be an upgrade in the ratings if Western Union witnesses organic revenue growth, margin expansion, increase in free cash flow and its leverage reaching 2x.
However, the ratings could be downgraded if the company suffers a revenue decline, compressed margins, weak free cash flow and the leverage sustaining above 3x.
Shares of this Zacks Rank #3 (Hold) company have lost 1.1% against its industry’s rise of 19.8% in a year’s time.
Stocks to Consider
Investors interested in the finance sector can look into some better-ranked stocks like Virtu Financial, Inc. VIRT, Fidelity National Information Services, Inc. FIS and Euronet Worldwide, Inc. EEFT. You can see the complete list of today’s Zacks #1 Rank stocks here.
Virtu Financial provides market making and liquidity services to the financial markets around the globe. The company carries a Zacks Rank #2 (Buy) and came up with average trailing four-quarter positive surprise of 0.63%.
Fidelity National Information works as a financial services technology company worldwide. It sports a Zacks Rank #1 (Strong Buy). The company managed to deliver positive results in all the trailing four quarters, the average being 2.72%.
Euronet provides payment and transaction processing and distribution solutions worldwide. It has a Zacks Rank of 2. The stock pulled off average four-quarter beat of 2.68%.
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