Western Union Is Set to Soar

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

According to the latest data, India tops the list as the world’s largest market for inward remittances. During 2012, India received $69 billion in remittances while China came in second with $66 billion. However, despite being the largest receiver of foreign funds, India is still one of the fastest growing markets for global money transfers. Naturally companies that have a huge exposure to the country stand to benefit here, which is why I believe that Western Union (NYSE: WU) is well poised for an upside.

Spectacular times ahead

Although Western Union provides a range of financial services across the globe, its money-transfer services account for around 85% of its total revenue. So it is imperative to track the growth prospects of its core business in the world’s largest market for money transfers.

To begin with, Western Union doesn’t reveal country-specific data, so it's currently not possible to gauge the regional performance on a quarterly basis. However according to market estimates, it dominates the Indian remittance industry with an 80% market share. Although MoneyGram (NASDAQ: MGI) and Xoom (NASDAQ: XOOM) also remit cash to India, Western Union is ahead of its peers mainly due to its widespread geographical reach, with over 106,000 transfer locations across the country.

The main reason behind India being at the pole position is because the Indian rupee has depreciated by nearly 50% over the last two years. Apart from export- related small and medium enterprises, Indian expatriates in foreign countries have been sending money back to India at a record rate. But I firmly believe that the remittance market will only accelerate from here.

This is because the Indian rupee just crashed to an 11-month low. The Reserve Bank of India has been aggressively purchasing rupee, but to the horror of Indian importers, it has failed to arrest its depreciating currency. If the rupee continues to lose value, it's only natural that foreign institutions, Indian expatriates and export- related companies start pumping money into India to take advantage of the weak rupee. This will most likely translate into higher revenue for Western Union.

Global growth prospects

On the global front, Western Union enjoys a market share of 15% (2012). That may be significant, but definitely not huge. Global banks transfer a monstrous chunk of money. So in order to boost its global market share, Western Union is rapidly expanding its network in China. According to estimates, there are 50 million Chinese citizens living in foreign destinations who will most likely propel China ahead of India in terms of inward remittances over the next five years.

But that’s an industry-wide advantage, which will also benefit Moneygram and Xoom. However it's worth noting that Moneygram and Xoom are relatively smaller companies, and can comfortably coexist in a growing market. According to the latest data, Moneygram operates with around 5% to 6% global market share, while Xoom has between 2% and 4% market share.

However, Xoom may seem to pose a threat to Western Union’s services. The company provides mobile money-transfer solutions on smartphones and tablets,  which eliminates the need to go to physical locations. Additionally, not having these physical locations saves a lot rental and hiring costs for Xoom. It is due to this reason that Xoom enjoys a hefty gross margin of 67%, while Moneygram and Western Union operate with a 43% margin each. But it's also worth noting that Western Union also has a mobile app that services mobile transfers with ease.

Meanwhile shares of Moneygram recently breached their 52-week high. The company recently hired Bank of America to explore its options pertaining to the partial sale of its equity. According to this source, private equity firms including Carlyle Group, TPG Capital, Bain Capital and GTCR have already bid for a stake in the company.

Moneygram has been hemorrhaging cash for the last five years, and its last equity sale was worth $1.5 billion in 2008. Since the company recently posted a net loss of $72 million despite having record revenue of $1.3 billion (FY 2012), it's not hard to conclude that Moneygram needs to be refinanced again. It is due to this reason that its shares are upbeat.

Final words

In my opinion, Moneygram’s stake sale may entail further upside, but it is also speculative in nature and involves a great deal of risk. Shifting focus to its larger peer, I firmly believe that Western Union stands to benefit from the booming Indian market. Its shares appear to be undervalued with a forward P/E of 10.6x and a PEG of 0.9x, while its dividend yield of slightly less than 3.0% seems lucrative. In my opinion, Western Union deserves a buy rating.

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Piyush Arora has no position in any stocks mentioned. 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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