Is The Western Union Company Destined for Greatness?

Let's see what the numbers say about Western Union.

Apr 30, 2014 at 7:00AM

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Western Union (NYSE:WU) fit the bill? Let's look at what its recent results tell us about the company's potential for future gains.

What we're looking for
The charts below tell Western Union's story, and we'll grade the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Here are Western Union's key statistics:

WU Total Return Price Chart

WU Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

6.7%

Fail

Improving profit margin

(17.8%)

Fail

Free cash flow growth > Net income growth

(3.8%) vs. (12.3%)

Pass

Improving EPS

5.5%

Pass

Stock growth (+ 15%) < EPS growth

(8.6%) vs. 5.5%

Pass

Source: YCharts. * Period begins at end of Q4 2010.

WU Return on Equity (TTM) Chart

WU Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(61.7%)

Fail

Declining debt to equity

(32.5%)

Pass

Dividend growth > 25%

78.6%

Pass

Free cash flow payout ratio < 50%

32.7%

Pass

Source: YCharts. * Period begins at end of Q4 2010.

How we got here and where we're going
Western Union's score hasn't changed since our last assessment, as the money-transfer leader earned the same six out of nine possible passing grades this year as it did at the end of 2012. However, the company's profit margins have plummeted due to fierce competition from technologically adept money-transfer services that are now available at lower cost in many parts of the world where Western Union once dominated. One of Western Union's passing grades was only awarded on a technicality -- the decline in its free cash flow is less severe than the drop in its net income over the course of our three-year tracking period. Will Western Union's patient shareholders be rewarded with a rebound in 2014 and beyond, or will the company finally discover that its services just can't compete in a mobile world anymore? Let's dig a little deeper to find out.

Western Union recently reported lackluster fourth-quarter earnings, largely due to cutthroat price competition from low-cost (or no-cost) mobile payment systems offered by leading telecom operators such as Vodafone (NASDAQ:VOD). My fellow writer Reuben Brewer notes that Vodafone's M-PESA money transfer service has picked up massive market share in emerging-market nations including India, Kenya (where it owns 75% of the market!), South Africa, and Egypt. Vodafone also has its eye on European markets, as it rolled out M-PESA services in Romania last month. While Western Union has been gearing up to target underbanked consumers in emerging markets, it faces an uphill battle against Vodafone and other money-transfer companies such as MoneyGram (NASDAQ:MGI) and Xoom (NASDAQ:XOOM).

According to the Federal Deposit Insurance Corporation, 28% of the U.S. population is "under-banked," which means they have limited or no access to banking services. Fellow Fool Reuben Brewer notes that Western Union, Xoom, and Green Dot all plan to drive domestic growth by rendering bank-like services to this largely abandoned consumer segment. Western Union's efforts on this front include prepaid cards, which it's also pushing hard in international markets. However, Xoom's recent acquisition of online bill-payment service provider BlueKite could undermine Western Union here as well -- Xoom's customer count grew 36% year over year in its fourth quarter even before it added this increased level of convenience.

Retail giant Wal-Mart (NYSE:WMT) is also undercutting Western Union and its peers through a new partnership with Euronet Worldwide subsidiary Ria. This team will launch a branded money-transfer service called Walmart-2-Walmart, which poses a major danger to MoneyGram (Wal-Mart's current money-transfer partner), but could also threaten Western Union simply due to its humongous size and its preference for setting up shop in areas high in underbanked populations.

Foolish writer John Divine points out that Wal-Mart has already launched its own money-transfer services at more than 4,000 domestic locations, and it seems determined to undercut current industry rates by as much as 50%. Consequently, Western Union might be forced to lower its prices to remain competitive domestically. However, management plans to produce $1 billion in operating cash flow next year, which is consistent with its results from the past five years. The company has also authorized a $500 million share repurchase program to bring back investors' confidence.

Putting the pieces together
Western Union has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

This company will change the payments business forever
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Vodafone and Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers