09 January 2007

Western Union (WU)

Blog Hog John C. recently said hello and suggested the Pig sniff out a truffle-y morsel called Western Union (WU).

I haven't had my value-investing cap on recently, so no wonder WU failed to get noticed by yours truly. So I went to Morningstar, Seeking Alpha, and Google News to dig up some reports and insight into this well-known, and recently spun-off stock.

Western Union is a $17B company that specializes in worldwide money transfer services. Morningstar's Mark Weber has has a fair value of WU of $32 a share. WU closed today at $21.96, putting it in deep 5-star territory. Weber likes WU's industry-dominant position over competitors like MoneyGram (MGI), and its high profits and billion-plus-and-growing free cash flow. Western Union is a long-standing, trustworthy brand in a business that thrives on convenience and reputation.

If you don't have a Morningstar subscription, here is a no-subscription-required interview with Mark Weber, discussing why he would buy WU if his employer permitted. Weber makes a key point regarding the competitive advantage of the Western Union brand:

Western Union is one of he world's most-recognized brands. More importantly, it's a trust brand. Most of the firm's customers are immigrants to wealthier countries from poorer ones...They need to know that the cash they send home will be available to their families. After years of reliable service, Western Union has established a solid reputation among migrant communities. Immigrants know that their hard-earned cash will get from point A to point B if they use Western Union. Given how important the transaction is to the customer, it's hard to get him or her to switch to a competing service when Western Union has never let them down.

Fat Pitch Financials on Seeking Alpha distilled Weber's arguments (and on the surface, his $32-a-share valuation model) making the long case for WU. Fat Pitch likes WU's wide business moat and vast network that grows with minimal incremental costs.

BusinessWeek just published a piece on a remittance transfer upstart called Microfinance International (MFIC) that is supposedly going to stir up the industry. The MFIC business model/article thesis is a lovely bit of Nobel-inspired optimistic hooey.

We'll just ignore those parts.

Here's a good bit from the article:

In the U.S. alone, 12.6 million Latin American immigrants will send home $45 billion in remittances in 2006. Over the last two years, the percentage of Latin American immigrants regularly sending money home to their relatives has increased from 61% to 73%, and the average amount of each remittance increased from $240 to $300.

These figures are great news for WU. 12% more immigrants sending 25% more money home should equate to increased revenues and cash flow for WU, and higher share prices for WU shareholders.

Here's an even better bit from the article, including use of the "some say" journalistic crutch, but with an actual, live, named source:

Traditionally, the remittance industry has been dominated by Western Union (WU), which made almost $1 billion on sales of almost $4 billion last year, and Moneygram (MGI), companies some say haven't had the customer's best interests at heart.

"They're gouging. Their profit margins are 30%, so if you can serve the poor efficiently charging an appropriate rate, then that's great. It's a great opportunity," says Geoff Davis, president and CEO of Unitus...

Blah blah blah.

Okay, I'm not so heartless as to not want to profit off of the gouging of the poor.


C'mon, don't cry.

Price gouging and ridiculous profit margins are good for investors. And Western Union should feel secure in their ability to generate those margins. Congress isn't going to go after Western Union. Immigrants don't vote much. The poor--not so much either. We can start to worry if AARP-card-carrying seniors start using Western Union's services, and then complain to their Representative. And anyway, another W stock, Wal-Mart (WMT), already has the starring role of corporate whipping boy.

One of Western Union's hometown papers ran a supportive piece last Saturday:

One of Brian Barish's hot stock picks: Western Union, the money-transfer business spun off by First Data.

The Douglas County-based company is a good example of a "misvalued" stock he likes.

Barish, lead manager of the Cambiar Opportunity Fund, cites uncertainty surrounding Western Union and notes investors have worried about a drop in business along the "U.S.-Mexico corridor" amid the immigration reform debate.

"It's had a chilling effect," he said.

I think this creepy photo has a chilling effect, Brian.

Perhaps this short-term uncertainty argument is why the stock is a relative bargain.

The Watch List grows...


Anonymous said...

Big margins will not stay longer, they are more and more niche players. The corridor USA-Mexico is lost for WU, Sigue and Pronto Envios have become number one. In Europe companies like MoneyTrans will be one day the leaders in this market, and they are going very fast. When you work with money only pricing and network is important.

Blogger for peace said...

FYI - You can access Mornignstar, Wall Street Journal and lots of those subscription sites for free with a netpass from: http://news.congoo.com

Andrew Tobias blogged those last week. My free tip!