Sunday, April 28, 2013

Western Union Update on poor performance

I had written about Western Union 4 years back and is below. As is painfully clear, it has not worked out as well. Here is some background for why I was interested and some reasons for things not working out well. Background: I was attracted to this stock for it's low asset intensive business (minimal capital requirements) with a leading profitable market share (moat). Needless to say, things have not worked as I first expected. Here is a review. Be sure to read my previous posts on this stock.

1. The unemployment rate is 10% plus which is a damper. The impact on housing and low income occupations are even higher. The money sent to Mexico is mainly from construction industry and that has dried up. I think most headwinds are over in this front.

2. Company retains almost all of it's capital. So it earlier said 15 to 18% growth in eps which would have been ok. But now it has pulled that prediction and does not distribute the capital. Need to check how that capital is spent. The company missed aggressive stock buyback during spring 2009. Caution may be one reason but not necessarily best capital allocation strategy.

3. The company's lower margin in international segment will possibly change with the increase in scale as per investor day in june 2008. Possible reasons for WU not doing well over past few years: 1. Western Union (WU) is constantly reducing prices to capture growth in transactions. This is true even before the recent announcement in 2012 about sustained price decrease or "pricing investment" as the Management calls it in annual report. It is very difficult to sustain ably create earning growth if you have to bring down prices to capture additional transactions. 2. It also points to a deeper issue. Mr. Buffet has said that rising prices for services is the ultimate test of a company's strength and competitive advantage. In the case of WU, it is the reverse. It has to reduce prices to capture growth. It does not show competitive strength. 3. WU's competitor MoneyGram had major missteps during financial crisis. But those missteps were in another line of business and caused significant dilution of stock holders at that time. However, new capital and new owners now are growing the money transfer business within Moneygram. Plus they are capturing new corridors of money transfer every day and this limits WU's advantage of charging premium prices. Further, WU has lost exclusive access to certain agents in Mexico. This causes company to fight for market share by lowering prices. 4. So, whats next? WU will still be a profitable enterprise and be one of two competitors in money transfer business. Unless the overall market size of money transfer increases, it is unlikely there will be much growth based on past 5 years. Company has recently increased dividends and that is a good sign. They are better off doing dividends than share repurchases as they did during early parts of company's life after spin off. Summary: I do not believe market is unfairly punishing the stock price ($14) considering above. The yield is attractive but growth expectations need to be minimal.