A Leading Global Payment Service for Long Term Investors

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anyone remember March 2009? It was a time when the stock market reached a bottom; the Dow Jones Industrial Average was more than 6,600, the S&P 500 was around 680, and many great businesses were priced like peanuts. A great business that was priced at $10.43 per share in March 2009, is now trading at only 20% higher than that low, at $12.71 per share. It is Western Union (NYSE: WU).

Western Union the leading global business in money transfer and payment services. When people hear about Western Union, they think about reliability, trust, convenience, and speed. The global established brand brings consumers peace of mind when it comes to money transfer and payment. It has a condensed network of more than 485,000 agents in more than 200 territories. In fiscal 2011, there have been money transfer activities in around 70% of its locations. How does Western Union make money? From fees charged customers when they make payments or send money. The majority of its revenue has been in consumer-to-consumer, accounting around 84%-85% of total revenue, whereas global business payments accounted for 14%.

Since 2008, Western Union has managed to deliver double-digit return to shareholders. Its TTM ROIC is 27.37%, and the net margin has been increasing to 21.87%. At the same time, the business has grown its book value quickly while reducing financial leverage level, from 20.8x in 2009 to only 8.16x over the past twelve months. Its operating cash flow and free cash flow have been quite consistent since 2005, and they are now $1.15 billion and $930 million, respectively.

On Oct. 26, Western Union was trading at $17.93 per share. By Oct. 31, it dropped to $13.43 per share, after the company lowered its FY12 guidance. Previously, the company expected that its GAAP EPS would be $1.68 - $1.72, but it has lowered it to $1.60 - $1.63. It was also lower than analysts’ expectation of $1.76 EPS. Along with the announcement, the company declared its quarterly dividend of $0.125 per common share, a 25% growth compared to the previous quarterly dividend. It also planned a new share repurchase of $550 million, expiring at the end of 2013. As of September 2012, it has nearly $1.15 billion in stockholders’ equity, $1.8 billion in cash, and $8.2 billion in total liabilities. The two main items in the liabilities were payables and accrued expenses at $4.14 billion, and long-term debt at $3.43 billion.

Western Union's share are trading at $12.71 per share, with a total market capitalization of $7.58 billion. The high level of debt has made its enterprise value reach nearly $9.6 billion. However, the debt level is acceptable as its interest coverage stays at 7.62x. The EV/EBIDTA is only at 5.72x. Its forward P/E is only 7x, half of its 5-year average level of 14.5x.

Business-wise, Western Union owns 20% of the market share in international remittances. The second position is held by MoneyGram International (NASDAQ: MGI), which is much smaller with a $685 million market cap and around 267,000 agents globally. Since 2007, MoneyGram has kept generating losses due to its investment portfolio.  Its other peers include Paypal, a subsidiary of eBay, and American Express (NYSE: AXP). The business of American Express is much broader than Western Union's. It is a much larger corporation with a $60.77 billion market capitalization. Over the past 10 years, it has kept generating profits and paying consistent and increasing dividends. It is paying 1.4% dividend yield on the share price of $54.30, half of what Western Union is paying to its shareholders. The market is valuing American Express at 11.6x forward earnings.

Foolish Bottom Line

Western Union is a market leader with a huge economy of scale. The business has a wide moat focusing on global remittances and payments. In the short-term, it might have some glitch of underperforming analysts’ expectations. But with a low valuation, decent dividend yield, and constant cash flow generation, I think Western Union could be a safe bet for long-term value investors. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Express Company and Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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