Money-moving-meister and Motley Fool Inside Value recommendation Western Union (NYSE:WU) reports its Q3 2007 earnings results tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Twenty-two analysts follow Western Union, giving it nine buy ratings, a dozen holds, and a sell.
  • Revenues. On average, they're looking for 10% sales growth tomorrow, to $1.25 billion.
  • Earnings. However, profits are predicted to plummet 18% to $0.28 per share.

What management says:
CEO Christina Gold pronounced herself "pleased" with Western Union's second-quarter performance back in July, calling the results "in-line with our expectations" and "consistent with our full-year guidance." International money transfers among consumers headlined the quarter's growth, with total cross-border transaction growth at 20%. However, revenues generated by these transactions rose only 14%, suggesting margin compression.

What management does:
And indeed, that's what the numbers show us in the table below. At all levels -- gross, operating, and net -- the margins have fallen steadily for well over a year. Part of this, as management points out, comes from the company incurring higher costs as a result of being independent of First Data. But there's also an across-the-board trend: Revenue growth is lagging transaction growth everywhere you look. Internationally, revenues grew more slowly than transactions. Domestically, they fell more steeply (a 5% decline in transactions led to a 10% decline in revenues).

The good news, margin erosion notwithstanding, is Western Union still earns operating margins that put rivals like CheckFree (NASDAQ:CKFR) and MoneyGram (NYSE:MGI) to shame. The only firms in similar lines of business, earning operating margins similar to Western Union's, are credit card firms MasterCard (NYSE:MA) and American Express (NYSE:AXP), or eBay (NASDAQ:EBAY), with its PayPal sidekick.

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

46.9%

46.6%

45.8%

45.6%

44.8%

43.8%

Operating

31.6%

30.7%

29.8%

29.3%

28.6%

28.0%

Net

22.9%

21.5%

21.3%

20.4%

19.5%

18.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Depressing as the margin trends appear, there was also good news last quarter. Western Union raised its guidance for free cash flow this year. The firm now expects to generate a cool $1 billion in operating cash flow, spend less than $200 million on capital expenditures, and wind up with more than $800 million in cash profits. As much as half of that haul will then be poured into share buybacks.

From a valuation perspective, Western Union's free cash flow expectations mean the company may actually be a bit more expensive than it looks. While the firm's trailing P/E sits just north of 16, we're looking at a price-to-free cash flow that should approximate 18 by year-end. Weighed against profits growth that analysts predict will average 12% per year over the next five years, the shares look pricey by either measure. Personally, I wouldn't be a buyer until either: (a) Western Union proves it's able to ramp up its growth in excess of expectations, or (b) the share price falls by a third.

Looking for a second opinion on Western Union? Find out what the value sleuths at Motley Fool Inside Value think about the company. You can instantly access their latest thoughts on this three-time recommendation when you sign up for a free trial to the service.

And if two opinions aren't enough for you, perhaps I can interest you in a third? We recently interviewed Western Union's boss, CEO Christina Gold, for our members. Read the interview right here if you are already subscribed to Inside Value. Or again, sign up for the free trial and you'll have Fool access to the transcript.

Fool contributor Rich Smith does not own shares of any company named above. eBay is a Stock Advisor pick. The Motley Fool has a disclosure policy.