We are reiterating our Neutral recommendation on Western Union Co. ( WU ). Though the company holds niche market position in the global money transfer business, headwinds such as huge compliance costs, significant competitive pressure, and a challenging macro environment keep us on the sidelines.
Why the Retention?
Western Union is a stalwart among peers like Moneygram International Inc. ( MGI ) and Xoom Corp. ( XOOM ), given its strong brand name, deep reach within th U.S. markets, superior customer service, fast penetration in high-growth international markets and a wide presence at 515,000 locations in more than 220 countries. Supported by these solid fundamentals, the company has been posting positive earnings surprises in the past six straight quarters averaging at 9.8%.
Going forward, we expect Western Union to maintain this strong earnings trend on the back of bright prospects of its key Consumer-to-Consumer business, which accounts for more than four-fifth of the company's total revenue. The segment is poised to benefit from an increase in global immigration trends.
Moreover, Western Union's strategy to lower prices in order to attract customers should help it regain its lost market share. The company has already witnessed transaction growth in markets where has taken such initiatives.
We are also optimistic about the strong progress made by the company in its new age service offering via electronic channels such as online banking, westernunion.com, ATMs and mobile money transfer. Revenues from digital channels exceeded $150 million last year, and the company is on track to meet its goal of reaching $500 million in revenues from such channels by 2015.
In 2014, Western Union is poised to experience transaction growth owing to the addition of Walgreen Co. ( WAG ) - the largest drugstore chain in the country with over 8,000 locations - to its distribution network.
However, compliance- related expenses, which are expected to increase to a range of 4.5% of revenues in 2014 from approximately 2.5% of revenues threaten to eat into this Zacks Rank #4 (Sell) money transferor's bottom-line earnings.
We note that Western Union's business is dependent on the global macroeconomic situation. With the major economies of the world still recovering, the remittance volume may be impacted to some extent, leading to restricted earnings.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.