Investment thesis
Western Union (NYSE:WU) has lost almost 48% of its market value over the last year, creating a substantial margin of safety and discount from its intrinsic value. I believe the company is fairly cheap based on its earning power value and along with potential capital appreciation, it also provides a 6.8% dividend yield. It is also worth considering that Western Union has a robust and impressive brand value and a significant market to capture. Additionally, I believe Latin America will play a significant role in Western Union’s growth in the coming years.
Business Model Overview
Western Union is the world’s largest money transfer firm and it provides its services in more than 200 countries by leveraging a global network made of approximately 600,000 retail agent locations. The company’s services are available in over 16,000 corridors, which are country-to-country pairings, such as from the U.S. to Mexico. Western Union completes around 2.2 million transactions each day between its three business segments: Consumer-to-Consumer, Consumer-to-Business, and Business-to-Business.
The Consumer-to-Consumer segment at Western Union is all about making it easy for individuals to send and receive money, both within and between countries. In fact, a large majority of the transactions facilitated through this segment are cross-border. The company offers a variety of ways for consumers to access its services, including through its own websites and mobile apps, such as westernunion.com, as well as through a network of retail agent locations worldwide. Additionally, the company partners with other digital platforms to offer its services on their internet and mobile applications. Whether you’re looking to send money to a loved one across the globe or just down the street, Western Union’s Consumer-to-Consumer segment has you covered with convenient and efficient money transfer options.
The Consumer-to-Business segment is focused on providing convenient payment options for consumers to make payments to businesses and other organizations. This includes everything from utilities and auto finance companies to mortgage servicers, financial service providers, and government agencies.
Finally, the Business Solutions segment is geared towards small and medium-sized enterprises and other organizations and individuals. It offers payment and foreign exchange solutions, including cross-border, cross-currency transactions. In 2021, the company announced it’s willing to sell the Business Solutions segment to Goldfinch Partners and The Baupost Group for about $910 million.
Economic Results
Western Union revenue has been steadily declining over the last 5-years going from about $5.52 billion in 2017 to $5.07 billion in 2021, while its operating margin has also declined from 25% in 2010 to 22% in 2021. As of the last quarter, the company’s financial results showed a decline in revenue compared to the previous year. Specifically, the company’s revenue decreased by 15% on a reported basis, or 6% on a constant currency basis when excluding the contribution from the Business Solutions segment. This decrease was partly due to the suspension of operations in Russia and Belarus, which had a negative impact on revenue of around three percentage points. However, the company also saw a boost in revenue of one percentage point due to inflation in Argentina.
In terms of earnings, Western Union reported a GAAP EPS of $0.45 for the third quarter. This represents a decrease compared to the $0.57 reported in the same period in the previous year. The decrease was attributed to lower operating profit, partially offset by a lower effective GAAP tax rate and a lower share count. Overall, these results suggest that Western Union’s financial performance in the third quarter was substantially weaker compared to the same period in the previous year.
Valuation
Western Union’s earning power value per share (EPV) is currently $31.42, which represents a margin of safety of 56% based on the current price. This EPV is calculated using a 5-year average operating margin of 19.95% to account for any unusual developments. When this margin is applied to the company’s 2021 revenue, it results in $1.01 billion in Earnings Before Interest and Taxes (EBIT). In addition, 25% of the company’s Selling, General, and Administrative (SGA) expenses, which are essential for supporting the company’s growth, were added back to the EBIT. The average adjusted SGA is around $280 million, which results in an adjusted EBIT of $1.29 billion when added to the EBIT. The current corporate tax rate is 21%, which results in a Net Operating Profit After Tax (NOPAT) of $1.02 billion. This figure is then adjusted for the company’s average maintenance capital expenditures of $206 million, resulting in a normalized NOPAT of $1.226 billion. This normalized NOPAT is then discounted at a rate of 9% to arrive at an EPV of the business of $13.62 billion. As of the last quarter, Western Union had $2.61 billion in interest-bearing debts and $1.17 billion in cash and cash equivalents on its balance sheet. When these amounts are added to the EPV of the business, the EPV of the equity is approximately $12.18 billion. In the third quarter, the company had a total of 387.6 million diluted shares outstanding. Taking all of this into account, the EPV per share for Western Union is $31.42, providing a margin of safety of 56%.
Conclusion
In my opinion, Western Union is a good buy at its current price. It offers a solid margin of safety of 56%, which provides a good level of protection for patient investors. Additionally, the company’s 6.8% dividend yield is an attractive bonus for those looking for both capital appreciation and dividends. Overall, I believe Western Union is a good investment opportunity that can provide a strong return for investors.
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