The Western Union Company (WU) reported fourth-quarter 2013 operating earnings of 31 cents per share, in line with the Zacks Consensus Estimate. Earnings, however, compared unfavorably with 40 cents per share reported in the prior-year quarter.
Western Union's total revenue of $1.4 billion was flat on a year-over-year basis, and increased 1% on a constant currency basis. Strong growth at electronic channels and Business Solutions was largely offset by the impact of the previously implemented pricing investments in the company’s consumer-to-consumer segment. Reported revenues came in line with the Zacks Consensus Estimate.
Total expenses increased 4% year over year to $1.2 billion on account of higher cost of service as well as increased selling, general and administrative expenses.
Full-Year Highlights
For full-year 2013, total revenue of $5.5 billion was down 1% on a constant currency basis, primarily due to a decline in transaction fees. Reported revenues were a tad lower than the Zacks Consensus Estimate of $5.6 billion.
Full-year earnings per share came in at $1.43, coinciding with the higher end of the company’s guidance range but were down 16% year over year.
Segment Update
Consumer-to-Consumer revenues of $1.15 billion were down 1%, but were flat on constant currency basis, as transaction gains of 9% were negated by the impact of previously implemented price reductions in certain corridors. Operating margin in the segment declined 450 basis points (bps) year over year to 20.5%.
In the Consumer-to-Business segment, revenues of $149.5 million decreased 2% year over year, but was up 5% on constant currency basis. The U.S. electronic and the South America business reflected growth, partially offset by decline in the U.S. cash walk-in business. Operating margin in the segment declined 450 bps year over year to 20.5%.
Revenues at Western Union Business Solutions of $100.2 million increased 8%, or 12% on constant currency basis, led by strong performance in Canada and the U.K. and higher revenues from customer-hedging activities. The segment’s operating margin increased 880 bps year over year to 10.6%. Management expects revenues at the segment to increase in low double digits in 2014.
Electronic Channel revenues, which include westernunion.com, digital and account-based money transfer through banks, surged 32% in the quarter and contributed 5% of the company’s total revenue.
Financial Update
Western Union generated cash flow from operations of $1.1 billion for full year 2013. Capital expenditures were $75.0 million in the fourth quarter. For the full year, capital spending was approximately 4% of revenues, which was in line with the company’s outlook.
In the quarter, the company bought back 3.5 million shares for $59 million. The company also paid $69 million in dividends.
Western Union also announced a new $500 million share repurchase authorization, which expires on Jun 30, 2015.
The fourth-quarter GAAP operating margin declined 330 bps year over year to 16.8% due to the impact of pricing and other strategic investments, higher compliance expense and lower compensation expense in the prior-year period, partially offset by lower marketing expenses.
2014 Guidance
For full-year 2014, Western Union projects low to mid single digit constant currency revenue growth and EPS in the range of $1.40 to $1.50. The outlook takes into consideration the impact of increases in compliance costs and modification in certain compliance procedures.
Cash flow from operating activities in 2014 is estimated at approximately $900 million, or $1 billion excluding anticipated final tax payments related to agreement with the Internal Revenue Service from 2011.
Western Union estimates its compliance-related expenses to comprise 3.5% to 4% of revenues in 2014.
The company's operating margins in 2014 are expected to range between 19% and 20% compared with 20% in 2013.
Our Take
Despite being exposed to high compliance costs and other regulatory hurdles, Western Union managed to exit 2013 on a strong note. In 2014, we expect the company to benefit from strategic steps taken to strengthen consumer money transfer with emphasis on digital money transfer, driving accelerated growth in Business Solutions, and generating and deploying strong cash flow.
Western Union has an industry-wide network of over 500,000 agent locations and over 100,000 ATMs. The company plans to focus on adding new retail locations and more account-based options in 2014 to make the Western Union network unrivaled in the industry.
Western Union carries a Zacks Rank # 3 (Hold).
Other Stocks
On the same day as Western Union, peer Moneygram International Inc. (MGI) reported fourth-quarter 2013 earnings of 35 cents per share, beating the Zacks Consensus Estimate by 3 cents.
Some better-ranked stocks like American Express Company (AXP) and Global Payments Inc. (GPN), both with a Zacks Rank # 2 (Buy), are worth considering.
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