A Money Transfer Company Built to Last

Technological advancement is an ever-evolving story of "out with the old and in with the new." The nation of India, for example, decided to end its 163-year-old telegram service this year as the age of mobile phones, Facebook, and email have made telegrams obsolete.

The advent of the Internet and lightning-fast communication has certainly bought much change, and the world of money transfer is no exception to this trend.

So, what is the new "gig in town" that threatens to displace older technologies? The answer is online money transfer. Online money transfer is revolutionizing how people send money from place to place around the world. I believe one company is specially poised to reap massive rewards from this technological shift: Western Union (NYSE: WU  ) .

Western Union's competitive advantage
You might be scratching your head right now, thinking "Western Union? Aren't those the guys who used to dominate the now-dead telegram industry?" You're exactly right. Englewood, Colorado-based Western Union was the dominate force in the telegraph industry in the late 19th century, but discontinued its telegram service in 2006 for obvious reasons.

So, it might at first seem that Western Union is an enduring relic of the past. But the company has not only survived disruptive new innovations; it has effectively utilized new innovations and has overhauled its business model to keep pace with a fast-changing world.

You are probably familiar with the phrase "change is the essential continuity of life" in one form or another. Western Union has taken this adage to heart and has navigated momentous changes for over a century and a half. The company is an industry leader in global money transfer and still has a toehold in communications. Western Union's products and services include consumer-to-consumer money transfer, businesses solutions, bill payment services, and stored value options such as prepaid cards. Consumers can send money online, by phone, from 100,000 ATMs or through more than 520,000 agent locations worldwide.

Compare those statistics with the prospects of Western Union competitors MoneyGram (NASDAQ: MGI  ) and Xoom (NASDAQ: XOOM  ) . MoneyGram has only 300,000 agent locations, while Xoom has no offline sales network.

In addition, Western Union has a strong network in two-way money transfers. But rival Xoom can only offer transfers from the United States to foreign countries. There are no Xoom services to transfer money between states or from foreign countries to the United States.

Valuation metrics give Western Union the upper hand 
In addition to Western Union's large competitive advantage over MoneyGram and Xoom, Western Union is currently trading at a discount to its fair valuation while MoneyGram and Xoom are generally overpriced. Fellow Fool contributor Jordan Wathen illustrates the details of why Western Union deserves a higher valuation:

Western Union's ability to turn revenue into cash is unmatched...Upstart Xoom only recently recorded its first quarterly profit, and it trades at 75 times annualized earnings. MoneyGram trades for 17 times forward earnings...Western Union deserves a higher valuation [a]t 10 times earnings and free cash flow, and with a competitive advantage in offline money transfer...Western Union is a two-for-one deal. You get a piece of the legacy assets (a leading offline money transfer business), and an online business growing at 33% per year. Investors are severely discounting its highly profitable offline business and pricing power going forward.

In addition, Western Union currently touts an impressive quarterly dividend, while MoneyGram and Xoom both do not offer this cash incentive to investors.

Although Western Union shares have made impressive gains already in 2013, the stock still has plenty of upside for value-oriented investors. MoneyGram shares have appreciated due to buyout rumors, while Xoom shares have seen a paltry 12% gain in its life as a public company most likely in part due to Xoom's first quarterly profit ever reported:

WU Total Return Price Chart

WU Total Return Price data by YCharts

MoneyGram and Xoom might both be profitable companies but are currently trading at levels exceeding their shares' fair valuation. Western Union, on the other hand, is priced for further sustainable growth ahead.

Conclusion
Unfortunately for Indian telegram companies, they definitely would not have been good investments this year as new technologies have long left telegrams in the dust. Western Union, a former telegram empire, is a company that has successfully navigated our fast-paced global economy for over a century and a half and offers investors a compelling long-term investment choice.

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Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2013, at 6:31 PM, oxymoronic78 wrote:

    Look up Ria Money Transfer. Their first money transfer is free is seriously attracting more and more registrations and transactions and I think they are seriously becoming serious contenders to the big dogs like WU.

  • Report this Comment On September 12, 2013, at 10:27 PM, DrGreyB wrote:

    Another Fool article promoting WU. Again, XOOM is a lot better than WU. Cheaper, fast (in minutes), more convenient (online, mobile). The article mentioned XOOM as having no physical stores, and that is exactly the advantage of it as compared to WU, that's why it is a lot cheaper, faster, and more convenient. PLEASE stop these daily articles of Western Union. If you haven't used the services of XOOM or WU, PLEASE stop writing. I am an expat and used to sending money via WU until I discovered the benefits of XOOM.

  • Report this Comment On September 13, 2013, at 8:04 PM, EvanBuck wrote:

    @DrGreyB

    Everyone's entitled to their own opinions :) While you may be correct in a couple of your observations, I still believe WU is as of now a far superior investment to XOOM. WU has unparalleled free cash flow, its shares trade at a discount, and consistently raises the amount of money it returns to investors. XOOM is content to sit on its laurels and bleed cash all day while its stock soars sky-high overshooting its fundamental value.

    While XOOM does have some presence online, I have some news for you: much of the world doesn't have any Internet access. And that's one big area where WU wins, because XOOM is ONLY online while WU has both services. You might argue "well, internet usage is expanding, and XOOM will thus grow!" Maybe so, but even still WU has a large competitive advantage by already being a big presence in areas without Internet.

    See this link for more information: http://www.fool.com/investing/general/2013/09/10/why-this-st...

    Maybe someday XOOM might be a good investment, but as of now WU is the dominant top pick in the money transfer business.

  • Report this Comment On October 28, 2013, at 8:46 PM, kmacattack wrote:

    I sent money to an out of state relative today, and was going to use Xoom, because they had a large discount on your first transaction. The problem is, you can't send money WITHIN the US. It is only good for sending and receiving money between countries, not within the US itself. So they really don't compete with Western Union directly in the US since they don't do intrastate transfers.

    But Western Union looks like they are doing well as far as stock price appreciation. If they are up 40% this year and pay a dividend to boot, it looks like a good bet.

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