Thread: Be Patient, It'll Deliver

Be Patient, It'll Deliver

WESTERN UNION'S BUSINESS is all about fast money — cash zapped around the globe in a flash. An investment in the stock, however, may require some patience.

The company, spun off from First Data on Sept. 29, does a brisk business handling money transfers for the world's migrant population. While that service presents tremendous opportunity for the long term, it puts Western Union uncomfortably close to America's debate over immigration policy. The rhetoric and the uncertainty could put a damper on the company's profit outlook, at least through the November elections.

Chances are, though, that investors who hang tough will be rewarded. After all, the company has an unrivaled global franchise, a strong market, a highly profitable business model and a freshly motivated management team.

Western Union (WU) traces its history to the dawn of the Telegraph Age in the mid-19th century. It was an original Dow Jones Average member in 1884, and introduced the first consumer charge card (1914) and the first singing telegram (1933).

It was spun off from First Data (FDC) after more than a decade as a subsidiary of the data-processing giant. With the stock trading recently around $19.75, the company has a market value of $15.1 billion and is already a member of the Standard & Poor's 500 Index.

Today Englewood, Colo.-based Western Union is focused almost exclusively on money transfers. It has over 270,000 agents in 200 countries, making it more than three times as large as its nearest competitor, MoneyGram International (MGI).

Essentially, Western Union is a play on increasing cross-border emigration and immigrants' propensity to wire money home. The global migrant population last year numbered 191 million, according to the United Nations, and is projected to grow to 280 million by 2050.

The overall market for cross-border remittances, meanwhile, grew an average of 8% a year from 2003 through 2005, a period in which Western Union increased its market share from 10% to 15%. This has enabled the company to grow faster than the industry, with revenue, operating profits and operating cash flow each climbing an average of 12% annually from 2003 through 2005.

Western Union has enviably high profit margins, above 25%, thanks to its ability to charge relatively high prices for money transfers. Those margins should help produce about $1 billion in annual operating cash flow that can be used to reduce its $3.5 billion in debt and repurchase stock.

Still, there's no denying the political risks. As First Data was on its road show to discuss the spinoff, it lowered revenue and profit guidance for the remainder of the year and for 2007, blaming a slowdown in U.S.-to-Mexico transfer volumes amid talk of a crackdown on illegal immigration. Immigrants, even legal ones, evidently shied away from sending money home for fear of government scrutiny.

At the moment, Mexican business accounts for about 10% of revenue. A JP Morgan analyst figures that — as a worst-case scenario — 19-to-25 cents in earnings per share could be at risk related to "consumer fears surrounding immigration reform." Those are significant sums: The consensus earnings-per-share forecasts for 2006 and 2007, reflecting the new company guidance, are now at $1.06 and $1.10, respectively. (The numbers aren't directly comparable, because the '07 forecast includes the added costs of operating as an independent public company.)

As immigration concerns heated up, the Arizona attorney general last month subpoenaed the company's records on transfers from Arizona and 28 other states to the Mexican state of Sonora, reportedly seeking information about the smuggling of immigrants and drugs. Last week, Western Union won an order staying the request until a hearing Oct. 16.

At a minimum, Western Union, will need to spend money to win back loyalty in immigrant communities and assure customers that they are not at risk. And the stock could well prove volatile in the weeks ahead.

THE FIXATION ON immigration-policy risks has overshadowed Western Union's stellar long-term growth prospects, globally diversified business and fairly attractive equity valuation. Key markets like Asia, India, Africa and Russia, while much smaller than Mexico, are growing briskly. Following the 2007 adjustments to a public-company cost structure, earnings should resume their 10% or better growth path.

The Bottom Line
The shares are off to a slow start, hurt by a clouded outlook for money transfers over the Mexican border. But patient investors could well enjoy a stock climb of 14% or more.

At the current share price, Western Union trades for just under 18 times expected 2007 earnings. That might not seem cheap, but steady, low-capital-intensity businesses like transaction processors tend to fetch premium multiples. MoneyGram also garners a 2007 multiple near 18.

But JP Morgan's Tien-tsin Huang notes that 25% of MoneyGram's profits come from its payment-systems unit, essentially a bank-like business which earns an interest-rate spread on a check and money-order portfolio. Place a bank-like multiple on those earnings, Murphy says, and MoneyGram's core money-transfer earnings are given a 21-22 multiple on 2007 earnings. At 21 times its 2007 forecasts, Western Union would be worth 23, or 14% higher than the stock's current level. And that wouldn't account for its superior network and market share.

What's more, established businesses that are spun off have a strong tendency to have their shares outperform once liberated. Western Union management has been freshly loaded with stock options, most of them profitable only above the current stock price. You don't need to receive a singing telegram to recognize that company executives have strong incentives to enrich themselves and shareholders by confounding the doubters.

http://www.smartmoney.com/barrons/index ... y=20061012

JP
I know this is very sketchy but it's from my memory bank....
Someone big - amnesty backer - is linked to FIRST DATA. Mccain perhaps? I can't get to the doc but wondered if you might remember.

I honestly cant remember....