Moody's Investors Service of
) have downgraded
Western Union Co.'
), senior unsecured rating by one notch to Baa2 from Baa1,
following a review of the company's operating profile.
The rating agency is of the opinion that huge compliance costs,
significant competitive pressure, and a challenging macro
environment are some of the headwinds, which will keep the
company's revenue growth under check.
Western Union has also given a constrained outlook regarding its
2014 operating profit. The company does not expect any operating
profit growth in 2014 since the improvement in revenue will be
offset by higher compliance costs.
Western Union's financial policy will also strain its debt
profile. Despite having $1.7 billion cash, half of this amount is
located outside U.S. There is also short-term restriction on the
use of available cash. This financial policy would compel the
company to use incremental debt in order to provide funds for a
purpose such as share buyback, which will weaken its leverage
Another worry for the rating agency is that Western Union's
traditional money transfer business suffers from competitive
pricing pressures and emerging payment technologies. In
order to preserve and grow market share, initiatives such as
pricing reduction, higher expenditure on research and
development, mergers and acquisitions, customer acquisition
costs, payout to agents; will only thin bottom-line earnings.
Moody's expects that the company's adjusted debt to EBITDA will
remain in the mid-to-high 2 times range going into 2015 with free
cash flow to debt of around 15%. These metrics are in line with
companies belonging to Moody's Baa2 tier rating.
Moody's maintains a stable outlook on the company taking into
consideration factors such as low single digit revenue growth
which will also be supported by overall industry revenue growth,
flat profits, and cash flow from operations of approximately $1
billion in 2014.
Financial strength and credit ratings measure the company's
ability to meet policyholder obligations, and are important
factors affecting public confidence and creditworthiness of a
company that reflect a company's competitiveness. Though the
downward rating movement cautions us about the company's
operating condition, yet a stable outlook suggests that no
near-term adverse rating action is on the cards.
Going forward a positive rating action may follow if the company
manages to grow its profit by a minimum of 5%, adjusted debt to
EBITDA moderates to lower than 2x, operating margins stay above
25%, and cash flow from operations exceed $1.3 billion. A reverse
rating action may follow if the company loses market share and
revenue growth, there are increases in regulatory control over
the industry, debt to EBITDA of more than 3x, operating margins
fall below 18%, and the company increases use of debt.
Western Union carries a Zacks Rank #3 (Hold). Other players
FleetCor Technologies, Inc.
) with Zacks Rank #1 (Strong Buy) and
Portfolio Recovery Associates Inc.
) with Zacks Rank #2 (Buy) are worth considering.
FLEETCOR TECH (FLT): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
PORTFOLIO RCVRY (PRAA): Free Stock Analysis
WESTERN UNION (WU): Free Stock Analysis
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