This Global Leader in the Money Transfer Business is Really a Buy

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

After the significant drop on the market in November 2012, Western Union (NYSE: WU) has experienced a nice run-up, climbing from around $12 per share to more than $17.30 per share at the time of writing. Despite the 44% gain, Western Union remains cheap at only 10.9 times its forward earnings. I personally think that there is still decent potential upside for the company in the near future.

A clear leader in global money transfer industry

Western Union, the leader in the money transfer industry, has more than 160 years in operations, with 515,000 Agent locations in over 200 countries. The majority of its revenue, 81% of the total 2012 revenue, was generated from the Consumer-to-Consumer (C2C) transactions, while Consumer-to-Business accounted for only 11% of the total sales. A lot of the C2C transactions were conducted via retail (96%), whereas only 4% of the total C2C transactions came from the website and Account Based Money Transfer services.

According to Aite, the cross-border remittances market will grow in the range of 6%-7% in the next three years, to reach around $563 billion of principal in 2015. Western Union is well positioned for that decent growth because it possesses a market-leading position with a 15% market share. MoneyGram (NASDAQ: MGI) ranked second with a much lower market share of only 5%, owning around 310,000 Agent locations in 197 countries.

Much more profitable and a decent dividend yield

Indeed, Western Union has a much broader network, higher market share and better economies of scale than MoneyGram. How about the operating performance?

<table> <thead> <tr><th> </th><th> <p><strong>Operating margin (%)</strong></p> </th><th> <p><strong>ROIC (%)</strong></p> </th><th> <p><strong>Net debt/EBITDA</strong></p> </th><th> <p><strong>EV/EBITDA</strong></p> </th><th> <p><strong>Div yield (%)</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Western Union</strong></p> </td> <td> <p>23.1</p> </td> <td> <p>17.9</p> </td> <td> <p>1.54</p> </td> <td> <p>7.4</p> </td> <td> <p>2.9</p> </td> </tr> <tr> <td> <p><strong>MoneyGram</strong></p> </td> <td> <p>4.5</p> </td> <td> <p>N/A</p> </td> <td> <p>Net cash</p> </td> <td> <p>7.6</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

We can clearly see that Western seems like a much better business, as it delivered much higher profitability. In the past twelve months, while MoneyGram generated losses, Western Union produced around a 17.9% return on invested capital. The operating margin of Western Union was also higher at 23.1%, while the operating margin of MoneyGram stayed at only 4.5%.

Although MoneyGram had a net cash position, its equity was negative at $(172) million, due to nearly $(1.28) billion in cumulative retained earnings. Of the two, only Western Union offers shareholders a dividend yield at 2.9%. In terms of valuation, MoneyGram is a bit more expensively valued, at 7.6 times its EBITDA multiple. Western Union is a bit cheaper with an EBITDA multiple of 7.4.

Recently, MoneyGram has put itself on sale and it reported that it had talked to several potential buyers. According to Barron’s, analyst James Friedman of Susquehanna Financial Group thought that MoneyGram could be bought out at around $27 per share, implying a EBITDA multiple of around 9.4. If the EBITDA multiple of 9.4 was applied to Western Union, the company should be worth around $22 per share, a 27% premium to its current trading price.

Xoom – a fast growing but pricey online money transfer

In the increasing trend of using plastic payment and electronic transfers, the physical location money transfer business will face rising competition. A new online transfer company, Xoom (NASDAQ: XOOM), has emerged with operations in around 30 countries. Xoom is expected to scale up its business much faster than other physical location money transfer companies because it focuses mainly on online money transfer. Moreover, it incurred no cost for more customer additions. Because users care about the safety, convenience and cost when it comes to choosing money transfer companies, a lower-cost player would have significant advantages.

Indeed, Xoom has managed to grow quite rapidly, up 43% in the first quarter of 2013. However, the business is not profitable yet. Its GAAP net loss came in at $79,000 in this quarter, a significant improvement from a loss of $494,000 last year. For the full year, the company expected to generate $104-$106 million in revenue, while the net loss was estimated to stay in the range of $0.37 - $0.32. Xoom seems to be quite pricey with a price-to-sales ratio of 9.6.

My Foolish take

Personally, I am quite excited about Western Union at its current price. Because it has a leading position and the broadest agent network in the industry, Western Union is a good stock for investors to hold in the long run. With decent dividend yield, a reasonable leverage level, a reasonable valuation and a high profitability, there will be more potential upside for this money transfer business. 

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Anh HOANG owns share of Western Union. The Motley Fool recommends 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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