To The Moon

$Western Union(WU)$

today, we're diving into an intriguing company. If you appreciate the payment processing tollbooth model of giants like Visa and MasterCard, then Western Union might pique your interest.

Western Union is a cash processing company undergoing a digital transformation, particularly in regions like the Middle East and Africa. Did you know there are more Western Union locations worldwide than McDonald's outlets in the U.S.? Recently, they appointed a new CEO, a fintech veteran from Fiserv, to revitalize the company.

In this article, we'll explore Western Union's business model, financials, and valuation. We'll also discuss the bull and bear cases for the company and, by the end, decide whether it’s worth investing in.

Business Model

Western Union primarily facilitates cash transfers between individuals and businesses, regardless of location or citizenship. This makes them especially relevant in underserved markets where traditional banking is inaccessible. For instance, approximately 2 billion people worldwide lack bank accounts, and in many areas, transferring money without one is nearly impossible.

Key demographics for Western Union include:

• Urban residents who distrust traditional banks.

• Undocumented migrant workers sending remittances.

• Rural blue-collar workers with limited banking access.

Unlike digital transfer platforms like Venmo or PayPal, Western Union operates with 400,000 locations worldwide. Recipients only need a 10-digit tracking number and an ID to collect cash, making the process simple and accessible.

Earning Overview

Revenue: Revenue has been steadily declining from $5.2 billion in 2019 to $4.2 billion in the last 12 months, signaling serious concerns.

In the third quarter of 2024, Western Union reported GAAP revenue of $1.04 billion, a 6% decrease compared to the same period in the prior year. This decline was primarily due to reduced contributions from Iraq, which negatively impacted the revenue growth rate by 7 percentage points. Excluding the impact from Iraq, adjusted revenue saw a 1% increase.

GAAP earnings per share (EPS) for the quarter were $0.78, up from $0.46 in the same quarter of the previous year. This increase included a $0.40 benefit from a settlement with the U.S. Internal Revenue Service regarding the company's 2017 and 2018 federal income tax returns. Adjusted EPS was $0.46, compared to $0.43 in the prior year period.

The GAAP operating margin for the quarter was 15.9%, down from 19.2% in the prior year period. The adjusted operating margin was 19.1%, slightly lower than the 19.6% reported in the same quarter of the previous year. These decreases were attributed to lower contributions from Iraq and strategic investments in new and expanded products within Consumer Services.

For the full year 2024, Western Union has provided the following outlook:

Fundamental Analysis

Revenue: The company reported $1.04 billion in revenue, a 6% decrease compared to the same period in the prior year. This decline was primarily due to reduced contributions from Iraq, which negatively impacted the revenue growth rate by 7 percentage points. Excluding the Iraq factor, adjusted revenue saw a 1% increase.

The company's Branded Digital segment reported an 8% increase in revenue (9% on an adjusted basis), with transactions up by 15%. This segment accounted for 25% of total Consumer Money Transfer (CMT) revenues and 32% of total CMT transactions. Additionally, the Consumer Services segment experienced a 32% revenue growth on a reported basis (15% on an adjusted basis), driven by the expansion of retail foreign exchange services, the launch of a new media network business, and continued strength in the retail money order business.

Earnings Per Share (EPS): GAAP EPS was $0.78, up from $0.46 in the prior year period, influenced by a $0.40 benefit from a settlement with the U.S. Internal Revenue Service regarding the company's 2017 and 2018 federal income tax returns. Adjusted EPS stood at $0.46, compared to $0.43 in the prior year period.

Dividend Profile

Western Union's current dividend yield is an impressive 8.8%, with a payout ratio of just 48%. While this indicates the dividend is sustainable, the company hasn’t increased it since March 2021, when it went from $0.22 to $0.23 per share quarterly. Although consistent, the lack of growth reflects the company’s declining fundamentals.

Balance Sheet:

• Cash on hand: $1 billion.

• Short-term debt: $445 million (manageable in the short term).

• Total debt: $2.5 billion (net debt: -$1.4 billion).

Agent Network: About 95% of Western Union's operations are handled by affiliated agents, not direct employees. These agents earn commissions while Western Union avoids overhead costs.

Economic Moat: Western Union’s unparalleled scale and global regulatory compliance make it a leader in cash transfers.

Guidance

In October 2024, The Western Union Company (NYSE: WU) updated its financial guidance for the full year 2024. The company now anticipates revenue between $4.125 billion and $4.200 billion, with GAAP earnings per share (EPS) projected to range from $1.94 to $2.04. This revision reflects a slight adjustment from earlier projections made in September 2024, when Western Union estimated revenue between $4.075 billion and $4.175 billion, and GAAP EPS in the range of $1.70 to $1.80.

These updates are part of Western Union's ongoing efforts to adapt to market conditions and align with its strategic objectives. In October 2022, the company introduced its "Evolve 2025" strategy, aiming for annual revenue growth improvement through 2025, operating profit margins between 19% and 21%, and mid-single-digit EPS growth in 2024 and 2025. Additionally, in December 2024, Western Union announced a new $1 billion share repurchase program and declared a quarterly cash dividend of $0.235 per common share, payable on December 31, 2024.

Free Cash Flow

FCF peaked at $1 billion in 2021 but dropped to $57 million in the trailing 12 months. The inconsistency and overall decline raise concerns about sustainability.

As of September 30, 2024, The Western Union Company (NYSE: WU) reported a free cash flow (FCF) of approximately $190.2 million for the third quarter. This contributed to a trailing twelve months (TTM) FCF of around $414.4 million. The company's free cash flow per share for the TTM ended September 2024 was $1.18. With a share price of $10.71 as of December 20, 2024, this results in a price-to-free-cash-flow ratio of approximately 9.11. Additionally, Western Union's free cash flow yield stands at 14.1%. These metrics indicate a solid cash-generating capability, which is crucial for funding operations, paying dividends, and pursuing strategic initiatives.

Technical Analysis

Support and resistance levels are key in technical analysis, representing price points where a stock tends to reverse its direction. For WU, the immediate support level is at $10.51, with subsequent support at $10.44 and $10.38. Resistance levels are identified at $11.

When we assess Western Union's adjusted stock price total return, the numbers paint a concerning picture. A one-year total return yields -1.6%. While their stock price dropped by 9%, the dividend cushions the fall, preventing a steeper decline. Looking at a five-year horizon, the total return plummets to -47%. Over ten years, it's -4%. Zooming out further to 20 years, you'd finally see a modest 12% return. For a 20-year investment, a mere 12% total return doesn't scream "wise investment" to me. I'd label this total return performance as a disaster—a messy and unattractive metric.

Net Profit Margin Analysis

Moving to their net profit margin, which is the most relevant metric for a mature company like Western Union, the picture is mixed. From 2022 onward, their gross margin and operating margin have been steadily declining. However, their net profit margin remains stable at 16%. This means for every $100 earned, $84 is spent on operations, leaving $16 as profit. While this stability is a positive sign, the declining gross and operating margins raise concerns about their overall profitability trend.

Share Buybacks: A Double-Edged Sword

Western Union has aggressively bought back shares since 2009, reducing outstanding shares from 701 million to approximately 337 million—a 50% reduction. While this would typically earn applause, in Western Union's case, the strategy seems misguided. Their stock price has been in decline for decades. Instead of buybacks, reinvesting that cash into growth, R&D, or acquisitions might have been a better use of resources. The buybacks feel like a weak attempt to artificially inflate value, a tactic that Wall Street has seen through.

Bullish Case for Western Union

Western Union has a monopoly in serving demographics reliant on cash transactions, particularly in the developing world, rural areas, and among undocumented immigrants. They provide an irreplaceable service for those without access to traditional banking or digital payment options. Their extensive global reach and the cultural reliance on cash in many regions, including highly developed nations like Japan, ensure ongoing demand for their services. Additionally, their shift to digital transactions shows progress, with 22% of their revenue now coming from digital services. Yet, even in digital, 70% of recipients still cash out their funds.

Bearish Case for Western Union

However, Western Union faces significant challenges:

• Competition from Fintech and Cryptocurrency: Although crypto is unlikely to disrupt their target demographic soon, fintech options like Cash App and PayPal are steadily capturing market share.

• Poor Capital Allocation: Billions spent on buybacks and dividends could have been used to fund innovation or growth.

• Policy Risks: Stricter immigration and border control policies could reduce their customer base.

• Perception Issues: Critics argue Western Union exploits low-income individuals, though the company also provides vital services to underserved populations.

Risk And Challenges

Western Union's debt levels have been a point of focus for investors and analysts. As of September 30, 2024, the company reported total debt of approximately $2.59 billion. This debt level, combined with shareholder equity of $652.7 million, results in a debt-to-equity ratio of 396.3%, indicating significant financial leverage. The high debt-to-equity ratio suggests that Western Union relies heavily on debt financing, which could pose risks, especially in volatile market conditions. Despite this leverage, the company has continued to engage in shareholder-friendly activities, such as announcing a new $1 billion share repurchase program and maintaining a quarterly dividend of $0.235.

It's important to note that while debt can be a tool for growth, excessive leverage may impact a company's financial flexibility and increase its vulnerability to economic downturns. Investors should monitor Western Union's debt levels in conjunction with its earnings performance and cash flow generation to assess the sustainability of its financial strategies.

In summary, Western Union's current debt situation reflects a high degree of financial leverage, which warrants careful consideration by stakeholders regarding the company's future financial health and operational performance.

As of September 30, 2024, The Western Union Company (WU) reported a debt-to-equity ratio of 3.96. This indicates that for every dollar of equity, the company has $3.96 in debt, reflecting a significant reliance on debt financing. Over the past year, this ratio has shown improvement, decreasing from a 12-month average of 5.06, which represents a reduction of approximately 21.74%.

However, when compared to industry peers, Western Union's debt-to-equity ratio remains relatively high. For instance, Visa Inc. has a ratio of 0.53, and Mastercard Inc. stands at 2.47. This suggests that Western Union is more leveraged than some of its major competitors, which could imply higher financial risk. It's important to note that a high debt-to-equity ratio can indicate greater financial leverage, potentially leading to increased volatility in earnings due to higher interest expenses. Investors should consider this factor when evaluating the company's financial health and investment potential.

Valuation

Using various valuation models, the estimated intrinsic value per share ranges from $13.97 to $22.26, while Wall Street analysts peg it at $17. With the current share price at approximately $10.68, there is theoretical upside. However, the bigger question is whether the company can grow or if it's on an inevitable decline.

Conclusion

Western Union's fundamentals make it a classic value trap. While it appears undervalued, the lack of a compelling growth story and its declining metrics make it a risky investment. Their reliance on buybacks and dividends instead of meaningful reinvestment into growth further cements this view.

If Western Union were to pivot effectively—perhaps by cutting dividends, reducing debt, and reinvesting in fintech or R&D—they might have a brighter future. For now, despite its strengths, I’d sit this one out. There are better opportunities in the financial sector, like PayPal, Square, or JP Morgan Chase, which offer stronger growth prospects and stability.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub