Western Union Co. WU at its most recent investors’ day presentation disclosed its earnings guidance, which was primarily driven by its growth strategy on different verticals.
Western Union’s revamped growth strategy is backed by its ability to meet increasing demand from global consumers and businesses for fast and reliable cross-border money transfer and payment solutions.
This strategy leverages Western Union’s continued investment in key capabilities such as digital, real-time account payout, compliance, and artificial intelligence. These investments have positioned the company to operate one of the most holistic and versatile payment engines in the world.
Western Union aims to grow its core consumer-to-consumer business as well as other payment segments where global organizations can utilize its cross-border solutions to expand into new markets or better serve existing customers. For instance, Western Union recently tied up with Visa Inc. V to facilitate reliable and efficient cross-border movement of funds via Visa Direct.
Western Union targets approximately 23% operating margin by 2022 and a low-double-digit EPS CAGR through 2022.
The operating margin and EPS targets are based on assumed 2020-2022 revenue CAGR of 2% to 3%, compared with the 2019 revenue base excluding divestitures (2019 GAAP revenue includes approximately $130 million related to the Speedpay and Paymap divested businesses). This revenue increase indicates growth in consumer money transfer, driven by westernunion.com and other third-party digital services and mid-single-digit growth from Business Solutions.
The operating profit margin and EPS targets also reflect $150 million in total annual savings expected by 2022, including $100 million from the restructuring announced on Aug 1, 2019. In addition to the restructuring, the company expects to achieve further operating efficiencies from initiatives aimed at optimizing commissions and reducing third-party spending. These initiatives are expected to contribute $50 million in annual savings to operating profit by 2022, which is net of reinvestment in the business.
From 2020 to 2022, Western Union expects to generate more than $3 billion of operating cash flow and return approximately $2.5 billion to $3 billion to shareholders through dividends and share repurchases.
For the long term, Western Union aims to drive revenues from a number of strategies which include – partnerships where it provides customized payments solutions to organizations such as e-Commerce businesses expanding into emerging markets, end-to-end cross-border solutions to third-party organizations to solve their consumer money transfer needs, cross-border services, such as foreign exchange and cash management, for institutions, and additional financial products for consumers.
The company sees incremental opportunity from such services over the long term.
Investors are encouraged about the company’s initiatives to move away from its brick-and-mortar payments model to a digital platform. This led to 28% rise in the stock, year to date, compared with the industry’s growth of 38%. This rise in the stock price is impressive, given the fact that in 2018, the stock witnessed a decline of 10.3%, compared with its industry’s growth of 5.5%, due to investors’ pessimism over its subdued performance.
Investors’ confidence will help Western Union to grow its market share amid rising competition from many fintech companies such as PayPal Holdings, Inc. PYPL and Square Inc SQ. These companies have entered the payments space in recent years and are fast eating into incumbents' market share due to their low cost and efficient services.
Western Union carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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