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Earnings Miss? Criminal Probe? Ha! Wire Transfers Must Go On, and Western Union Owns the Market

Want to hear about a great business?

Wire transfers. The big player in the industry happens to be one our great grandparents used to depend on when they had to dash off a telegraph to folks overseas in the 19th century: Western Union (WU). Western Union’s wire-transfer business eclipsed its telegraph business a long time ago. If you want to move money, Western Union has people in 510,000 agent locations in 200 countries, and they’re happy to help.

Until relatively recently if you were somebody from, say, Mexico who for some reason didn’t dare open a bank account here in the U.S. but who needed to wire money to folks back home who also didn’t have a bank account or a Paypal account or the like, your choices were awfully limited. Basically, Western Union, which didn’t require you to show an identification card for transfers less than $1,000, had you by your poblano.

Illegal immigrants in Los Angeles explained to Forbes in 2004 that they were used to spending 10 to 20% of the money they sent back home on fees. Sending $90 could cost $14. Meanwhile, the magazine said, Western Union’s costs were just $3 to $6 per transfer.

Taking rich advantage of what Forbes described as “the dreary unbankability of the underclass,” Western Union made lots of dough for its previous owner, Atlanta-based payment processor First Data. Then First Data spun Western Union off to become an independent publicly traded outfit in 2006.

The company gets four fifths of its revenue from its wire-transfer business. It is five times as big, revenue-wise, as Moneygram International (MGI). And Western Union’s revenues have grown steadily—much more so than American Express (AXP) in recent years.

WU Revenue Per Share TTM Chart

WU Revenue Per Share TTM data by YCharts

Yet the stock hasn’t been a big winner for long-term shareholders.

WU Chart

WU data by YCharts

And just in the last few days, it has doled out some hefty losses for its investors.

WU Chart

WU data by YCharts

The catalyst for the recent sell-off was the company’s announcement this week that it would close 40 percent of its locations in Mexico and that its earnings per share, which analysts are expecting to be around $1.68 a share this year, would probably tumble 10 to 15 percent next year.

At Chicago investment bank William Blair, analyst Robert Napoli and his colleagues reduced their investment rating on the stock in Western Union to “market perform.” “We are tempted to maintain our [old] rating,” they wrote in a report to investors on Oct. 31. “However, our confidence in management execution is diminished.” Napoli projects that Western Union will earn $1.52 in 2013.

Western Union’s management is struggling to adjust to some new rules in their industry. Regulators have turned up the pressure on the company and its rivals in order to prevent wire-transfer services from being used to launder money related to criminal activity. Those Mexican locations Western Union shut down didn’t meet the new regulatory standards.

Last March Western Union said it was served with a federal grand jury subpoena issued by the U.S. Attorney’s Office for the Central District of California. The jury wanted documents related to a former Western Union agent in Monterey Park, California. Also, Western Union added, the government was investigating it for possible violations of money laundering rules.

Are you a maximum-pessimism type investor? Western Union has a PE ratio that’s significantly lower than American Express or Visa (V), two other big players who live on fees from routine financial transactions.

WU PE Ratio TTM Chart

WU PE Ratio TTM data by YCharts

And Western Union has a significantly higher dividend yield -- one that appears to be well covered by earnings.

WU Dividend Yield Chart

WU Dividend Yield data by YCharts

Still, it’s hard to get very excited about investing in a company that’s having problems with the law and is projecting a tumble in EPS at a time when most financial services companies are growing nicely. I guess that’s what maximum pessimism is all about.

Stephane Fitch is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

Read more articles about: Company Analysis  

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