Bitcoin Doesn't Stand a Chance Against This Industry Powerhouse

Source: Public Domain Photos.

Late in 2013, money-transfer company Western Union (NYSE: WU  ) saw its shares tank on news that it would incur increased compliance costs in 2014. But that plunge isn't a sign of things to come in the year ahead.

There's plenty of friction involved in moving money around the world, and complying with a patchwork of regulations around the world is a significant hindrance. The difficult regulatory environment could actually be a good thing for Western Union, as it favors the largest company in the industry at the expense of smaller competitors like Xoom (NASDAQ: XOOM  ) .

2014 will bring with it flat operating profit at best for Western Union, but the company could grow stronger relative to its competitors, even as the rise of digital currencies like Bitcoin threaten the industry.

A good investment for 2014
Western Union enjoys high profit margins because of its scale. The company is by far the largest money transfer company in the world, recording $5.6 billion in revenue in 2012. This year, Western Union will spend between 3.5% and 4.5% of its revenue on expenses related to regulatory compliance, or as much as $250 million.

Photo: Western Union

Xoom, which had an IPO last year and saw its stock initially surge, has trailing 12 months revenue of less than half of Western Union's annual compliance costs. Money transfer is an expensive business to be in, and Western Union has been lowering its prices to snuff out the competition. This leaves Xoom little room for profit and an expensive path toward expansion.

Shares of Western Union haven't recovered much from their collapse toward the end of last year, presenting an opportunity to value investors. Trading at just about 10 times earnings, with a 2.9% dividend yield to boot, Western Union could be worth quite a bit more, especially if the company manages to return to revenue growth in 2014. Western Union is a stable business, and short-term problems have created a long-term opportunity.

Is Bitcoin a threat?
Digital cryptocurrencies like Bitcoin went mainstream in 2013, with the value of a single bitcoin rising from $13 to over $1,000 at its high. Much of the hoopla surrounding Bitcoin is the idea that it could be used to transfer money around the world with significantly less friction than traditional means. This would be very bad news for Western Union.

But the promise of Bitcoin is quite a bit overdone. There are currently very few businesses that accept Bitcoin as payment, meaning the digital coins would need to be converted into the local currency to be of any use at all. While the act of transferring bitcoins can't really be regulated, the act of converting into another currency can be. Last month, the cental bank of China did exactly that, banning financial institutions from handling Bitcoin transactions. Other countries, including the United States, could eventually take similar steps.

A majority of businesses would need to start accepting Bitcoin directly for the currency to have any staying power, and so far, there are very few. The most notable is Overstock.com (NASDAQ: OSTK  ) , an online retailer that does about $1.2 billion in revenue each year. The decision to accept Bitcoin, which will take effect later this year, looks to be partly an attempt to get some free press coverage, and partly an attempt to give the digital currency a boost. It looks like a gimmick more than anything else, and a risky one at that, given Bitcoin's massive daily fluctuations.

While the number of bitcoins is capped, there are plenty of other digital currencies basically identical to Bitcoin from a technical standpoint. There's very little barrier to entry in creating a new digital currency, so the question arises: What makes Bitcoin so special?

This is the major reason why digital currencies may never be fully accepted. While the number of bitcoins is limited, the number of digital coins of any type is essentially unlimited, and there's no inherent reason to favor one over another, since they're all technically very similar. There's even a digital currency named after an Internet meme called Dogecoin with a market capitalization over $1 million. As the absurdity of that statement sets in, it's clear that Western Union has little to worry about on this front.

The bottom line
Although costs will rise for Western Union this year, the company will actually get stronger relative to its competition. Digital currencies like Bitcoin pose no threat to Western Union in the short term, and likely pose little threat in the long term. Western Union is a solid company with a defensible economic moat, and that won't be changing any time soon.

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Read/Post Comments (7) | Recommend This Article (2)

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 January 07, 2014, at 1:13 PM, jonyesa wrote:

    i made an account just to tell Timothy Green that this article lacks in research and accuracy, I don't know if your goal was to drive traffic here or just to hate on bitcoin but "Overstock.com" online retailer that is going to start acepting bitcoins is not making a "(...)risky (decison), given Bitcoin's massive daily fluctuations." Overstock is experimenting with "BitPay" a service that aims to make merchants start accepting bitcoins by, at the moment of the purchase automatically exchanging the coins to dollars. So no, they are they are not taking a big risk, they are being smart and eliminating all those credit card and bank fee's so the items can have a more competitive price and they can maximize their profit margin.

  • Report this Comment On January 07, 2014, at 2:39 PM, mkj42 wrote:

    "I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse." -- Robert Metcalfe, founder of 3Com, inventor of Ethernet, 1995.

    "I think there is a world market for maybe five computers." -- Thomas Watson, chairman of IBM, 1943

    "This 'telephone' has too many shortcomings to be seriously considered as a means of communication." -- Western Union internal memo, 1876

    "Where a calculator on the ENIAC is equipped with 18,000 vacuum tubes and weighs 30 tons, computers of the future may have only 1,000 vacuum tubes and perhaps weigh one and a half tons." -- Popular Mechanics, March 1949

    "There is no reason for any individual to have a computer in his home." -- Ken Olsen, founder, Digital Equipment Corp., 1977, in a speech to the World Future Society

    "There is practically no chance communications space satellites will be used to provide better telephone, telegraph, television, or radio service inside the United States." -- T. Craven, FCC commissioner, 1961

    You can add this "prediction" to this list.

  • Report this Comment On January 07, 2014, at 3:43 PM, siriusly wrote:

    Timothy Green - the coming Bitcoin micro-payment revolution will save established media and create wealth for competent journalist bloggers etc. Didnt anyone tell you to do your homework. Also,see those "likes, shares, tweets" on the left side of this page. They will be monetized by Bitcoins soon.

    No Coin Tip for You!

  • Report this Comment On January 07, 2014, at 3:49 PM, siriusly wrote:

    p.s

    dump those western union stocks, remittance belongs to bitcoin

  • Report this Comment On January 07, 2014, at 5:22 PM, masterkrang wrote:

    Bitcoin transaction volume has already surpassed Western Union's.

    Don't believe me? http://imgur.com/asMMvxK

    Dump your stocks while you can. This is really bad news for Western Union.

  • Report this Comment On January 09, 2014, at 11:19 PM, Mybitcoin wrote:

    If I want to remit a thousand dollar to India today how will I use bitcoin? The writer is actually right.converting bitcoin to actual currency is not possible in most countries specially the ones WU has th highest number of remittances.

  • Report this Comment On January 10, 2014, at 11:53 AM, struktured wrote:

    It would be refreshing to read a good counterpoint to bitcoin hype, but this article is full of logical fallacies and head scratchers. For instance,

    "This is the major reason why digital currencies may never be fully accepted. While the number of bit coins is limited, the number of digital coins of any type is essentially unlimited, and there's no inherent reason to favor one over another, since they're all technically very similar...."

    This is absurd. You can't claim a currency will fail because there are other currencies similar to it.

    You could make a similarly false argument that paper currencies will fail because they are all technically the same- and because governments can arbitrarily issue more paper money, their supply is unlimited as well.

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