As part of our mission to provide coverage on your favorite companies, we bring you this series of articles where we drill down into recent SEC filings, so you don't have to.
For those of us not savvy enough to wade through the mountains of regulatory filing data from First Data's (NYSE: FDC ) spinoff of Western Union (NYSE: WU ) , both companies recently published 10-Ks, offering juicy details on what they look like on a standalone basis.
As is common in spinoffs, Western Union generously "transferred" $3.5 billion in cash and debt securities to parent First Data. Going forward, Western Union's additional debt must be paid down, leading to higher interest expense in the interim.
I'm not too concerned about debt, though, since Western Union is a cash-generating machine. In fact, First Data spun off Western Union to better allow investors exposure to the faster-growing money transfer business. On a standalone basis, Western Union churns out net margins in excess of 20%, and its net income approximates free cash flow, since minimal capital expenditures and subsequent depreciation are needed to run the business.
Western Union is a service business, providing financial processing systems to third-party agents who carry out money transfer and payment transactions. For a fee, Western Union transfers customers' funds across the globe. The business has grown quite nicely; last year, almost 300,000 agents carried out 147 million consumer-to-consumer and 249 million consumer-to-business transactions.
I'd be naive to call the business simple, but it appears straightforward enough -- fast-growing and highly profitable. As such, the competition is catching on, and firms such as Moneygram (NYSE: MGI ) and Global Payments (NYSE: GPN ) are gunning for a piece of the action. Western Union is twice as big as those two competitors combined, but all involved have experienced growth as the entire market expands. Large banks such as Bank of America (NYSE: BAC ) are also looking to capture market share, as is Wal-Mart (NYSE: WMT ) . (What isn't Wal-Mart trying to break into these days?) Still, Western Union remains the undisputed leader and most trusted brand name in the space.
What can Fools expect going forward?
Fellow Fool Emil Lee recently provided his take on fourth-quarter and year-end 2006 results, and also detailed that the company expects low double-digit sales and high single-digit operating income growth for 2007. Free cash flow will be down from 2006 levels, but could pick up steam as it works off the higher debt load.
Based on consensus analyst projections for this year, Western Union trades at just less than 20 times earnings. That's not a steal, but the stock hasn't done much since being freed from First Data back in September. I think the market is still getting comfortable with how Western Union will perform as an independent entity, but I'm in for the long haul, given the compelling economics of its business model. I'm even looking at the smaller competitors, since they're also trading near their lows for the year.
First Data, Wal-Mart, and Western Union are Motley Fool Inside Value recommendations. Discover more of the market's best bargains with a free 30-day trial subscription.
Fool contributor Ryan Fuhrmann is long shares of Western Union and First Data but has no financial interest in any other company mentioned. Bank of America is an Income Investor recommendation. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
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