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Western Union: An Old Firm Set for 21st Century Growth


In the age of start-ups, crowdfunding, venture capital, IPOs, LBOs, and M&A, it's reassuring to see a 161-year-old business steering a steady course through it all.

The Western Union Company (WU) is a leading global provider of money transfer services. Its Consumer-to-Consumer segment, which was responsible for 80.9% of net revenues through the first half of 2012, allows one individual to send money electronically to another in real time.

The majority of these transfers are initiated through 510,000 third-party agent locations worldwide. Collectively, these locations processed 114.86 million transfers with a total principal value of $39.6 billion in the first half of 2012.

The company's Consumer-to-Business segment, which produced 10.8% of first half revenues, provides services that allow consumers to send bill payments owed to businesses and other organizations, such as utilities, mortgage companies, financial service providers, and government agencies.

Through its Business Solutions segment (6.4% of first half revenues), Western Union offers business-to-business payment solutions for small and mid-sized companies. Because many of the transactions involve parties in different regions, the key service the segment provides is the exchange of currency at the spot rate in order to enable customers to make cross-currency payments.

The remainder of Western Union's revenues were derived from various other minor businesses. This includes the sale of money orders, prepaid cards and related services, and mobile money transfers.

Recent Results
Q2 operating results, which were reported in early July, showed a 4.3% year-over-year rise in total revenues to $1.43 billion. Excluding the negative impact of foreign currency translation, total revenues climbed 6.8%.

Consumer-to-Consumer segment revenues of $1.16 billion were flat from the prior year, as a 3.9% rise in the number of transactions processed to 58.49 million was offset by a decline in the average principal size and unfavorable foreign exchange rates. Consumer-to-Business segment revenues fell 2.7% to $149.4 million, but were flat in local currency.

Boosted by the acquisition of business payment processor Travelex Global Business Payments (TGBP) last November, Business Solutions segment revenues nearly tripled to $92.5 million from just $31.4 million in 2011.

The adjusted operating margin, which excludes restructuring expenses and charges associated with the acquisition of TGBP, fell 103 basis points to 25.29%. Adjusted net income rose 4.6% to $281.4 million. Thanks to a lower share count stemming from aggressive stock repurchase activity, earnings per share increased 9.5% to 46 cents. This was $0.03 better than expected.

Despite the strong quarterly results, shares of Western Union remain down about 6% so far this year. As with just about every other stock, much of this weakness stems from near-term growth concerns resulting from soft global economic conditions-particularly within Europe and the Commonwealth of Independent States (i.e. formerly Soviet Republics), where revenues fell 8% in Q2.

A more company-specific concern is the proliferation of competing electronic payment methods over the past decade. Web-based payment services have become especially popular due to the security and convenience they offer. Growth in mobile computing could also pose a threat, as new technologies allow mobile devices to act as a virtual wallet that can send and receive funds directly from one party to another.

However, we believe these competitive threats are overstated. After all, despite the growth in cheaper electronic money transfer options, the number of transactions Western Union processed in the first half of 2012 rose 7%.

In our view, the reason for this growth is due to the fact that much of the money transferred through the company's network is done so either out of preference for privacy or because of personal circumstance. This is particularly true in developing markets, where physical cash transactions remain prominent and bank accounts are rarer.

Bottom line: At a time when so many other companies have reduced their outlook for 2012, Western Union remains confident of its ability to deliver on the revenue, earnings, and cash flow guidance provided at the beginning of the year.

Editor's Note: This article was written by Taesik Yoon of Forbes Investor.

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