A lot of value investors have been waiting patiently for Western Union (NYSE:WU) to be freed from its yoke as a subsidiary of First Data (NYSE:FDC). Their wish was granted last September, and although Western Union hasn't exactly come blazing out of the gates in its first official quarter, management's tone and strategy indicated that its eye is still on the ball.
Wild, wild Western
Results were hurt by regulatory speed bumps, including seizures of Western Union money transfers in Arizona. Although the company received a favorable ruling last month, some customers who remit money back to Mexico continue to shy away from the brand. For the quarter, revenues rose 10% (9% organic) and operating income improved by 7%. For the year, sales were up 12% and operating income improved by 3%.
Looking at 2007, the company expects 10%-12% organic sales growth, 6%-9% operating income growth (excluding public company expenses), and $900 million in operating cash flow. Subtracting out $200-$250 of estimated 2007 capital expenditures, free cash flow guidance was between $650 million and $700 million.
Pockets of growth
If the stock market gets spooked by the somewhat tepid numbers, value investors might want to take a closer look. Skeptics think Wal-Mart's (NYSE:WMT) foray into the market with Moneygram (NYSE:MGI), and Internet payment services like eBay's (NASDAQ:EBAY) PayPal, pose competitive threats. Western Union dominates its industry (it does five times more transactions than Moneygram, its closest competitor), and the company isn't about to roll over and play dead. Management noted it still only has 17.4% of the $269 billion global cross-border remittance (sending money internationally) market, and it captured about 7.4 points of that in the past three years -- indicating that a lot of share is still up for grabs.
The company also directly addressed potential problems with the money transfer seizures. Its plan of attack involves:
- Distribution. Western Union added 500 additional agent locations in Mexico in the fourth quarter.
- Promotions. It's advertising special pricing on Univision (NYSE:UVN) and Telemundo.
- Pricing, particularly on foreign exchange charges. Toward the end of the quarter, management felt it was regaining some traction and was seeing improved volume, with fourth-quarter organic growth from Mexico up 4%.
Management also seems to have a penchant for getting its hands dirty on the front lines. CEO Christina Gold noted that she went to Zacatecas, Mexico, to launch a job-creation and economic well-being initiative with its governor, a prelude to her 10-city media tour in Mexico. This seems like a great way to increase goodwill with one of the company's most important constituencies.
In fact, the international segment, as well as the consumer-to-business (i.e., bill pay) segment, are Western Union's most important sources of growth. International business has grown 26% annually since 2001, and China grew over 30% in 2006. The company continues to wrap its tentacles around the industry by partnering to build its distribution. It extended a contract with La Poste in France and Agricultural Bank of China, and established a relationship with General Electric's (NYSE:GE) GE Money in Austria and Switzerland. Western Union has numerous other partnerships, including selling through Citigroup's (NYSE:C) Banamex in Mexico.
Although the results weren't stellar, there's a lot to like about this company. Its economic moat is sturdy, thanks to its great brand, incumbent distributional infrastructure, and network effects. It also has very high-quality earnings and great free cash flow, and should be able to reinvest that into the international and consumer-to-business channels at a high rate of return. Lastly, it still has plenty of market share to exploit. In the long run, I feel Western Union will be a big winner.
For additional reading on Western Union, click on the links below:
- Subscribers can check out this Inside Value look at Western Union.
- First Data goes it alone.
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 Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates comments, concerns, and complaints. eBay is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.
