The Power of Earnings: Western Union

Chartists, momentum investors and palm readers may disagree, but at The Motley Fool we know that a stock is worth only the cash flow its underlying business generates. But as investors, how do we know if we're buying those cash flows on the cheap or if we're paying too much for future expectations?

Try using the earnings power value (EPV), a quick way to calculate the value of a company's current earnings. Once we've crunched the numbers, we can then compare the EPV to a company's stock price to determine the value that investors are giving its earnings growth. Then you can make the call if it's worth paying up for that future growth.

If you're new to the EPV way, check out our primer here. Don't worry: You don't need a Ph.D. in finance -- just a few numbers you can easily find at Fool.com's quote pages. Let's take a quick look at the EPV for Western Union (NYSE: WU).

First: What it does
Western Union is the largest money transfer service company in the world, with a network of more than 400,000 agents in 200 countries and territories that sends electronic funds across the globe for people and businesses.

Second: The value of today's earnings
Using our handy EPV primer from above and a 10% discount rate (reasonable for this company), we calculate the following for Western Union:

Source: Author's calculations, CapitalIQ, a division of Standard & Poor's.

Third: Is it worth it?
Western Union is a steady, global cash-flow machine, but its growth rates don't set the world on fire. You can see from our Earnings/Growth Rates page that analysts expect about 4% earnings growth this year and 10% next year. So a stock price reflecting 9% growth from its EPV per share level doesn't seem unreasonable.

Fourth: Western Union's EPV vs. 3 Others
Let's see how Western Union stacks up against three other global payment or money changing players. Running these three companies through our EPV calculator (using the same 10% discount rate):

Source: Author's calculations, CapitalIQ, a division of Standard & Poor's.

So these three giants (the average market capitalization is $28 billion, with Paychex at $9.3 billion the only one smaller than Western Union's $10.9 billion) each have about the same amount of growth priced into their stocks based on a basic EPV model, and much higher than Western Union's. Do these stocks deserve premium pricing or is Western Union the better bargain? At Stock Advisor, where we've recommended Western Union, we think its global payment network will generate value for shareholders for years to come.

Remember, EPV is a handy tool to see what price investors are putting on a company's future. But it's just a starting point. Give it a try and let us know which of the above stock looks best for market-beating returns by posting your opinion down below.