A Great Business on Sale

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

As the S&P 500 has seen growth in excess of 10% this year, one of its components, Western Union (NYSE: WU), has watched its stock tumble over 25% in the same timeframe.  After guiding its Full Year 2012 outlook downwards, Western Union watched as Moody's, Fitch, and S&P, all cut their ratings on the company's dismal outlook.

With a FY 2013 EPS estimate 10% below its guided 2012 figures, Western Union (WU) has been roughed up by the merciless market and sold off as if it has been unable to turn a profit.  In reality, what remains is a long-standing company with a great brand and a prowess to generate cash, year after year.  In simple terms Western Union is a powerful, maturing company, with a low PE, and a high quality dividend.  Some of my favorite metrics for a true value pick.

Reasons for Excitement:

The Dreaded "Rebuilding Year"- As Western Union pointed out in its 3rd Quarter Earnings Release, Quarter 4 and FY 2013 will be a time of "Improving Consumer Value Propositions," or as it is unhappily known as in the investing community, a rebuilding year.  By lowering certain pricing points, WU is focusing on adding new customers for the long term and spurring immediate transaction growth.  While President and CEO Hikmet Ersek expects net income to drop by 10 to 15% in 2013, he believes the larger customer base will be a long term revenue boost, something that Western Union has proven time and time again in the past.

Share Buyback Program- While I am not normally a huge fan of share buybacks, I admit to being a big fan of them in Western Union's case, as they have $750 million to use in share repurchases before the end of 2013.  Using its current number of common shares outstanding, and taking away $750 million worth of stock, WU could bring shareholders a 10% return (all else constant) by 2013, from share repurchases alone. 

Dividend Growth and Low Payout Ratio- Along with its share buyback announcement, Western Union also declared a new quarterly dividend of $.125, a 25% increase from its previous payout of $0.10 each quarter.  With a payout ratio of only 19% and a TTM Free Cash Flow totaling over $900 million, Western Union continues to prove that it is not only capable, but dedicated to returning earnings to shareholders. Having a dividend that has grown from $0.01 in 2006 to $0.50 in 2012, Western Union offers a generous return of 3.7% to value investors interested in waiting out their rebuilding year.

Market Share- Owning 20% market share of the money transfer business, Western Union is roughly twice the size of its nearest, and only true direct competitor, MoneyGram (NASDAQ: MGI).  Furthermore, it has over twice as many agency locations as MoneyGram, and pulls in roughly four times the revenue of its smaller competitor.  With this powerful position in the money transfer market, Western Union is able to use its size to pass along price decreases much more efficiently than the likes of MoneyGram.

Digital and Mobile Transfer Growth- After posting digital revenue growth of 22% YoY in the 3rd Quarter and 40% digital transaction growth over the same time, westernunion.com is quickly becoming a major source of revenues.  As Ersek explained, they plan on growing digital revenues to $500 million a year by 2015, which would be close to 10% of overall revenues.  Furthermore, Western Union is continuing to expand its mobile money transfer presence, allowing funds to be transferred across borders via cellphone.

The Competition

Despite having few direct competitors, Western Union has a slew of peripheral competitors in the form of eBay (NASDAQ: EBAY) and its PayPal business, Google and its Google Wallet, and even the likes of ING Direct and a host of other online bankers.  As eBay continues to build upon its 100+ million active accounts, it is becoming a continued power in terms of generating electronic payments, not only from its eBay users, but from internet users everywhere.

However, while WU does face fierce competition in the mobile money transfer landscape, it continues to be a necessity for the unbanked, underbanked, and foreign workers of the world.  If nothing else, Western Union represents peace of mind for many, simply knowing that their finances will be transfered safely and correctly.  Because of this, much of WU's business is based around repeat customers which has created a fairly sticky service that is relied upon by millions.

The Valuations

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>PE/FPE</strong></td> <td><strong>5 Year PEG</strong></td> <td><strong>5 Year Rev. Growth</strong></td> <td><strong>5 Year EPS Growth</strong></td> </tr> <tr> <td><strong>Western Union</strong></td> <td>6.6/9.1</td> <td>.87</td> <td>2.5%</td> <td>12.1%</td> </tr> <tr> <td><strong>MoneyGram</strong></td> <td>15.33/10.55</td> <td>.84</td> <td>-.3%</td> <td>NA</td> </tr> <tr> <td><strong>eBay</strong></td> <td>17.15/18.34</td> <td>1.54</td> <td>10.8%</td> <td>57.7%</td> </tr> </tbody> </table>

Taking a quick glance at valuations, we have a company in MoneyGram who has been wildly erratic in terms of EPS, a boring but profitable company in WU, and eBay, who has seen its price jump 60% this year on the success of its marketplace business and PayPal's bright future.  Needless to say a direct comparison between the three is nearly impossible, but there was one thing that I found very promising in respect to WU.

Holding a 5 Year PEG of .84, Western Union shares are hanging right in there with MoneyGram in respect to how much its future growth will cost shareholders.  As MoneyGram is the much smaller company and has a promising growth runway ahead of it, I see this as an opportunistic sign for investors interested in WU. While its days of huge growth have turned into a mere 2.5% yearly bump in revenues over the last half decade, I believe these to be fairly impressive numbers nonetheless.  Considering its resilience after the '09 recession and its exposure to the current Eurozone meltdown, Western Union's 12% EPS growth looks quite acceptable in my opinion.

A Few Foolish Final Thoughts

Yes, Western Union isn't going to win any awards for being the sexiest company to own by any means, but that is what makes it a truly appealing value pick.  No huge growth story or flamboyant CEO's, but rather a geographically diversified company with a sticky business in emerging markets that likes to buyback stock at near all-time lows.  And pay out 3.7% dividends.  This is why I gave Western Union an 11% position in my portfolio, and am more than happy to collect these dividends until the market realizes its fair value.

joryko owns shares of eBay and Western Union. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend eBay 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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