We are reiterating our Neutral recommendation on Western Union Co. ( WU), following a mixed second quarter earnings release, which included a 5.9% positive earnings surprise. Over the past four quarters, this Zacks Rank #3 (Hold) company delivered positive surprise with an average beat of 10.1%.
On Jul 30, 2013, Western Union reported second-quarter 2013 operating earnings of 36 cents per share, a couple of pennies ahead of the Zacks Consensus Estimate of 34 cents. However, earnings compared unfavorably with 44 cents per share earned in the prior-year quarter.
Counting on the positives, Western Union’s key business, Consumer-to-Consumer (accounts for more than four-fifth of total revenues), has been witnessing growth for the past several years. We believe that this business segment will continue to be attractive as worldwide immigration is expected to continue to increase.
The company is also aggressively positioning its Business Solutions segment in the rapidly growing cross-border payments market for small to medium-sized enterprises.
Western Union is expanding internationally and is eyeing the emerging economies of China and India, where the remittance market is still under-penetrated. Another money transfer company, Moneygram International Inc. ( MGI) also has an active presence in the Asian region.
Western Union is also aggressively growing its new age technology offerings that include mobile, electronic, online money transfer, etc. Western Union offers prepaid card service for money transfer via MasterCard Inc. ( MA).
Western Union has a wide agent network, which has grown rapidly over the past few years, enhancing its global presence. It is bent on achieving 1 million agent locations worldwide. We view that this ongoing investment in the brand and new agent appointments reflects the company’s confidence in its market position.
On the tepid side, Western Union is facing compliance-related issues in certain markets such as Mexico and Latin America. This regulatory headwind has caused agents loss and consequent decline in revenue in these regions.
Moreover, Western Union’s business is dependent on the global macroeconomic situation. Since the major economies of the world are still recovering, the remittance volume may be negatively impacted, causing restricted earnings.
While we stay cautious on Western Union, another player – Outerwall Inc. ( OUTR) with Zacks Rank #2 (Buy) looks attractive.