The global economic downturn has dampened the otherwise ebullient worldwide business of consumer money transfers. So when Western Union (WU) in early February forecast sales and earnings for 2010 that were below Wall Street's consensus estimates, its stock quickly took a tumble. Trading at nearly $20 a share in early February 2010, the shares dropped to $15 by Mar. 10.
Investors, however, may have been too hasty in bailing out because the stock has already started to rebound, to nearly $17. Arguing that management's guidance was too pessimistic, some money managers figure Western Union shares are worth $25 to $27.
Western Union is the leader in global money-transfer services, operating over 410,000 agent locations in more than 200 countries. Some 85% of revenues are generated by consumer-to-consumer money transfers. It caters mainly to immigrants and workers who remit money to their families in their respective countries. And its recent entry into the prepaid cards market could be the next winner for Western Union.
Reasons for Optimism
"We believe the [management's] estimates are overly conservative," says Robert J. Dodd, analyst at investment firm Morgan Keegan, because they didn't factor in any potential global rebound in employment or expected gains in market share. Dodd lists several reasons to be more optimistic about Western Union: a ramp-up of business in Europe and a modest rebound in employment in 2010 continuing into 2011, cost-cutting and a $1 billion share-buyback program combine to "offer significant growth opportunities for Western Union into 2011."
Despite the 2010 guidance coming in below consensus estimates, "we believe the recovery story is on its way in the money-transfer business," says Bryan Keane, analyst at Credit Suisse, who rates the stock outperform with a 12-month target of $25 a share. He expects the growth momentum to build throughout this year and into 2011.
Western Union controls about 17% of the highly fragmented global money-remittance market, which is likely to perk up again this year, based on projections by the World Bank. Although money-transfer services are relatively mature, "Western Union should be able to drive incremental growth as it expands distribution to large U.S. banks to reach new customers," says Mark Boyar, president of Boyar Asset Management, which owns shares. He also notes that Western Union has signed a pact with Fidelity National Information Services to provide money-transfer services to its 8,500 institutional banking clients in the U.S.
"With its strong cash flow generation, dominant global brand and franchise, and multiple growth avenues, Western Union should command a premium valuation," says Boyar, who puts the company's intrinsic value at $27 a share.
"A Blockbuster Business"
One of the newest growth projects that Western Union is pursuing is issuing prepaid cards, launched in November 2009. It now has 150,000 cardholders enrolled. Issued by Visa (V) and MasterCard (MA), the cards don't require users to have bank accounts. Customers load up the cards with specific amounts at Western Union locations. They can be also used to remit money.
The cards could become a blockbuster business for Western Union, predict some analysts.Western Union expects the number of cards to jump to 750,000 by year-end 2010, says Tien-tsin Huang, analyst at J.P. Morgan, who rates the stock overweight. He thinks the prepaid cards are a natural extension of Western Union's core consumer-to-consumer product and can help it earn more bank-like fees from its customer base. (J.P. Morgan has done banking for Western Union.)
Huang says the prepaid card business could account for 5% to 7% of total revenues, or about $400 million, within a few years from virtually nothing at year-end 2009. The business is still in its infancy, says the analyst, but he believes more customers will adopt cards as soon as they realize their convenience versus carrying cash in their pockets.
Pure Play on a Global Recovery
Huang figures sales and earnings will start to recover in 2010, when he expects Western Union will earn $1.32 a share on revenues of $5.12 billion, up from 2009's $1.28 a share on sales of $5.08 billion. For 2011, he forecasts earnings of $1.45 on sales of $5.28 billion, rising to $1.55 on $5.48 billion in 2012.
In sum, Western Union, which acts like a money center for its customers who for the most part don't have bank accounts or credit cards, is a pure play on the global economic recovery -- and the nascent prepaid card business. And since the world economy is just starting to recover, investors may want to catch the stock while it's still depressed.
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