WU - Update and what now?

The advantages of Western Union (Ticker: WU) business model is fairly well known. It is scalable and generates lot of cash. We are now in a new reality and it is worth checking back if it is worth continuing to be invested. Here are some thoughts...

1. General ongoing environment: It looks like we are in for a period of prolonged downturn and possibly a reset to new level of economic activity rather than return to pre-bubble economic activity. Lets say, two years of painful revenue drops (15% drop) and followed by growth based on inflationary levels from that point. No one knows for sure but evaluating companies with this in mind is always a good start. If it survives this scenario, other scenarios (except great depression II) will be good outcomes.

2. Debt: In this environment, any debt is a bad debt. Western Union had around $2 Billion of debt. First the good news. Much of this debt is due to paying a dividend to First Data and not due to business needs. Western Union generates more than $1 Billion dollar of free cash flow per year. Still that assumes future will be like the past. Plus operating leverage works both ways. Since the network of money transfer is already established, incremental revenue falls to bottom line. The reverse (current situation) is also true. That is, drop in revenue could cause much steeper loss of earnings. I think management must act conservatively first and pay back debt as soon as possible.

3. The general lack of growth in economy means less activity in construction and employment levels. So in general, Western Union customers have less money to transfer. So revenue can drop off. This is negative like it is for many other companies.

4. Western Union's competitor (Money Gram) is weaker because of issues in their check cashing business. Since money transfer is not capital intensive business, Money gram can still find ways to grow. But not with as much strength to compete against Western Union. If it comes down to it, Western Union can sustain lower prices for longer than Money Gram. So weaker competitor does not hurt but does not help as much as it would in a capital intensive business. Plus perception of strong player is always a plus in anything to do with money.

5. While growth due to economic activity will be reduced, we can expect some acquisitions of smaller players. Plus smaller players may find it hard to withstand prolonged recession. This is positive.

6. Since multinational Banks are weaker, they may now start to focus on their core areas and not focus on money transfer. This is positive.

7. Western Union does not carry credit risk and can withstand prolonged recession if it manages it's expenses and debt carefully.

8. The current political climate in Washington may result in meaningful immigration reform which will be positive for Western Union.

In summary, if economy falls into few years of weakness, Western Union will take few hits to it's earnings but will survive. The pain until then is definite. But will remain as one of the last standing players. When economy eventually returns to more normal level, their rise will be remarkable! Or so I hope!