Western Union

Western Union (WU – $20) is the largest non-bank money transfer company in the world. Its primary business right now is to service the “non-banked” part of the population — specifically, remittances from immigrants back to their families at home. There are currently roughly 200 million migrants who are working in one country and supporting a family in another. And roughly 4-5 billion people in the world are, basically, unserved by banks and live in the cash economy. Government regulations – mostly rationalized on the basis of fighting terrorism or tax evasion or pretty much anything that threatens big banks – serve to eliminate all smaller competition in this business. For companies that already have the scale to incur regulatory overhead, those regulations make for a protected moat from competition. And the money transfer business itself is one that has phenomenal operating scale. Once the operating infrastructure is in place, it does not cost any more to send $1 billion through the system than it does to send $10.

Banks are increasingly – and quite obviously – not interested in competing with WU or even really remaining in the money transfer business. Rather, they seem hell bent on eliminating most of their “small” customers and focusing entirely on enhancing their central bank subsidies and their multinational clients. So the “unbanked” part of the world is not only likely to remain stable. It is likely to grow within developed economies themselves and not just among differing economies.

The money transfer business is highly fragmented. Western Union is 5x larger than its nearest competitor but has less than a 20% market share in its current markets. And it has not really even begun to tap markets outside the Americas.

WU has a roughly $12 billion market cap. Delivers roughly $1 billion in free cash flow (and net income) each year. Its reinvestment needs are minimal. Revenue growth has been about 5-7% per year which is surprisingly strong considering that unemployment has hit migrants harder than anyone else. Has gross debt of about $3.6 billion – half of which will need to be paid or rolled over in Nov. That is what IMO is creating the current depressed stock price.

WU has used its free cash flow over the last two years to (mostly) buy back stock (retired 12% of shares outstanding in the last 2 years) rather than to grow its business (currently WU has 400,000 points of service worldwide – mostly in supermarkets, gas stations, bank branches, etc). Given the undervalued stock price and the economic/financial uncertainties, this seems pretty smart to me.

I am comfortable that the potential November debt rollover is not going to be a problem. The corporate bond market is bubbly to say the least and WU has cash on their balance sheet to delever a little bit if they want to. The institutional shareholders are far more solid and index (S&P 500) funds are not the largest holders of shares. Likewise for the institutional bond holders – who are far more important if a true credit event is perceived.

WU is a 5 star opportunity. I think the shares are currently worth in the high-20’s based on the current business and current economic conditions. If employment generally recovers in the US, WU will be a major and early beneficiary. If stagflation hits, WU will benefit by having more zeroes (hence higher fees) sent through their system. If they use free cash to expand geographies, they will cement their #1 competitive position and create a more stable revenue stream. And the labor force that utilizes WU services is the one that can most quickly take advantage of and benefit from the dynamics of changing economic growth. They are mobile – unlike homeowners in an upside-down mortgage.

Post-script — A news item re WU. It may be about to buy Travelex for $1 billion. Travelex, according to its website, is the largest provider of foreign exchange to mid-sized corporate clients and the largest operator of FX/currency terminals at airports and tourist areas. An M&A may make shares of WU volatile but this sort of acquisition seems to be right in line with WU’s business.

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