Western Union Electronic Business Grows; Hurt by Compliance

On Aug 26, 2014, we issued an updated research report on the world’s leading money transfer company – Western Union Co. (WU). The company reported second-quarter 2014 operating earnings of 36 cents per share, in line with the Zacks Consensus Estimate as well as the year-ago quarter earnings. Though the expense increase overshadowed the revenue improvement, a lower share count mitigated the downside.

Total revenue of Western Union came in at $1.41 billion, missing the Zacks Consensus Estimate by 2.7%. However, results improved 1% year over year or 3% on a constant currency basis. Implementation of strategic actions for consumer money transfer helped the company return to the growth trajectory.

Western Union is a stalwart among its peers such as Moneygram International Inc. (MGI) and Xoom Corporation (XOOM) given its strong brand name, deep reach in the U.S., superior customer service, fast penetration within high-growth international markets and wide presence at nearly 500,000 locations in 200 countries, with over 100,000 ATMs.

Going forward, we expect Western Union to maintain this strong earnings trend given the prospects of its key Consumer-to-Consumer business which accounts for more than a significant chunk of its total revenue. The segment is poised to benefit from an increase in global immigration trends and is witnessing a rebound in its retail-oriented business which will bring strong revenue growth in the upcoming quarters.

We also favorably view the progress made by the company in its new age service offerings via electronic channels such as online banking, westernunion.com, ATMs and mobile money transfer. Electronic Channel revenues, which include westernunion.com, digital and account-based money transfer through banks, surged 27% in the second quarter and contributed 6% to the company’s total revenue.

However, the company has been facing compliance-related issues for quite some time. As such, the company is witnessing an increase in compliance expenses which could hurt 2014 revenues by approximately 3.5% to 4%, in turn, eating away the company’s earnings. Customer reluctance to remit funds via Western Union given its subjection to compliance-related hurdles may put pressure on the company’s top line while affecting its profitability.

Moreover, Western Union’s business is dependent on the global economy. With the major economies of the world still in their recovery phase, remittance volumes may be negatively impacted, leading to restricted earnings.

Other Stocks to Consider

While Western Union retains a Zacks Rank #3 (Hold), a better-ranked stock Vantiv, Inc. (VNTV) with a Zacks Rank #1 (Strong Buy) is worth considering.