Changing Western Union's Moat Rating to Narrow From Wide

Senior Equity Analyst

Brett Horn

Western Union's primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, a region that is about equally important for Western Union as the U.S., growth remains modest, with new entrants adding to the issues for legacy operators like Western Union. At this point, we don't see a long-term catalyst to meaningfully improve growth, with management focused on just stabilizing the business in the near term. Recent geopolitical events have been an additional headwind as the company made the decision to exit Russia, a significant money transfer market. We continue to believe Western Union has a moat based on its sizable scale advantage, but with a stagnant top line, the value of the moat going forward could be questioned.

Another major issue for Western Union is the ongoing shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company's business jumped to about a quarter of revenue. More recently, results took a sharp negative turn, and management is attempting to get this side of the business back on track with investments in its platform and pricing actions. 

We believe an aggressive approach is the best strategy, as Western Union positions itself to maintain its scale advantage despite the shift. In our view, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers has not led to strong overall growth historically, and we don't expect this situation to change.

Business Strategy & Outlook

Western Union is the largest player, by far, in an industry where size confers significant benefits. We see three potential advantages arising from the company’s size. First, we think Western Union has historically been able to maintain premium pricing in some corridors, resulting in an intangible asset advantage. Second, we think the company’s size has allowed it to pay relatively low commission rates to agents, as it could offer relatively high volumes as an offset, creating something of a network effect. Finally, we think the scalable nature of the business creates a cost advantage for an industry leader like Western Union. We think the first two competitive advantages (premium pricing and lower agent commissions) have eroded to a point where they no longer meaningfully contribute to the company’s economic moat. However, we think Western Union’s scale advantage—which, in our view, has always been the primary moat driver—remains in place. As result, we are lowering our moat rating from wide to narrow.

The money transfer business is highly scalable because the incremental costs of processing additional transactions are minimal. Agent commissions (about 35% of revenue) are variable, but beyond commissions we believe most costs for money transfer operators are fixed. Western Union generates almost three times as much revenue as its closest competitor, giving it a marked cost advantage over its rivals, and its operating margins historically have been significantly higher than its peers. We think the company's scale advantage has always been the most significant driver of its economic moat. 

We believe a relatively large agent network has allowed Western Union to maintain something of a stranglehold on premium locations in certain corridors, and that the company has been able to maintain high prices in locations where it enjoyed an effective monopoly on convenient locations. With money transfers typically being sent to and from the same locations repeatedly, we believe customers are willing to pay a premium if one company offers convenient locations that can’t be matched by competitors.

However, agent counts have narrowed dramatically over time, and Euronet, in particular, has been successful in replicating the size of Western Union’s agent network over time. Agent counts can be misleading, however, as not all agents are equal, and some are of no real value. Western Union notes that only about two-thirds of its agent locations generated a transaction in 2022. The quality of Western Union’s network still appears to be much better than peers and Western Union’s revenue per agent location is still more than twice its competitors. Further, the company’s agent network remains stable, with its top 40 agents (which generate almost 60% of its revenue) having been with Western Union for over 20 years, on average. 

But we think it takes only a modest leveling in agent networks to meaningfully lower Western Union’s ability to generate premium pricing. After all, if the company is able to maintain high fees because there are no other convenient options, it takes only one other convenient agent location to disrupt this situation. The impact can be seen clearly in the relative pricing pressure between Western Union and Euronet. Modest but ongoing price decreases have been typical in the industry for a long time. But over the last 10 years, Western Union has seen revenue per transaction decline at a 2.5% CAGR, compared with a decline of only 0.8% per year on average for Euronet over the same period.

The agents on both sides of cash-based transaction receive commissions, and the send agent generally is paid a larger fee than the receive agent. The mix of cash and digital transactions can influence this percentage, as digital transactions typically don’t have a send agent involved. Historically, we believe Western Union has been able to pay agents lower commission rates as its larger network allowed the company to offset the lower commission rate with higher volumes. For agents, this was attractive, as commissions for some agents are a secondary consideration, with driving more traffic into the agent’s store as the first priority. We think this advantage for Western Union was always fairly slight, as commission rates in the industry are fairly standardized and it was difficult for the company to justify a move too far away from industry norms. However, at this point, we don’t know that there is any appreciable advantage for Western Union in terms of commission rates. Its gross margin, while roughly in line with peers, is at the low end of the group. While other costs are included in cost of goods sold and classifications across the three might not be perfectly consistent, it is difficult to believe Western Union has a meaningful advantage in commission rates based on its relative gross margin.

An additional issue for Western Union in recent years has been the industry shift toward digital transfers. In our view, the competitive dynamics of digital transfers remain consistent with cash-based transfers, with size and the resulting cost differential being the primary consideration. Therefore, we see maintaining overall share across all channels as the primary factor in reinforcing Western Union’s moat. As such, we believe that Western Union has responded appropriately to this shift, having invested relatively aggressively to build out its presence in digital channels. Western Union generated 22% of its revenue from branded digital transfers in 2022 and we believe the company (in terms of revenue) is the largest digital money transfer operator, although its lead in this space is not nearly as wide as in cash-based transfers. 

We also see the company’s physical agent network as an advantage in digital transfers, given that we believe most digital transfers, while digital on the send side, remain cash-based on the receiving end. Western Union estimates that 70% of its digital transactions are cash-out on the receive side, and even digital-focused players such as Remitly and Xoom maintain physical receive agent networks. Money transfers typically flow from developed to developing economies, and most developing economies remain primarily cash-based.

However, more recently, Western Union’s digital revenue has declined, and the company is increasing spending on ancillary services such as digital wallets and digital banking to build out a more holistic service and lure customers back. These moves suggest the digital side of the business potentially should be viewed in the wider context of person-to-person payments, an area populated with significantly larger competitors. We think cross-border money transfers are very difficult to service given varied but generally heavy regulatory requirements around the globe, and PayPal’s lack of success with its Xoom acquisition implies that even large payment companies may struggle to build out truly global money transfer offerings. Still, we think the uncertainty around this industry evolution is further support for lowering Western Union’s moat rating to narrow.

Narrow

Economic Moat

Western Union

The Western Union Co. is a holding company, which engages in the provision of money transfer and payment services. It operates through the following segments: Consumer-to-Consumer, Business Solutions, and Other. The Consumer-to-Consumer segment facilitates money transfers between two consumers. The Business Solutions segment offers payment and foreign exchange solutions, cross-border, and cross-currency transactions for small and medium size enterprises and other organizations and individuals. The Other segment consists of electronic-based and cash-based bill payment services. The company was founded in 1851 and is headquartered in Denver, CO.

Earnings data Q1 2024

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Best Buy

Deluxe

Medifast

Medical Properties Trust

Walgreens

Xerox

As 2023 comes to a close, now may be a great time to figure out which stocks to sell. If you are an income-focused investor, this may entail figuring out the top dividend stocks to sell.

7 Doomed Dividend Stocks to Sell in December

DENVER--(BUSINESS WIRE)--The Western Union Company (NYSE: WU) today announced that the Company will present at the UBS Global Technology Conference on Tuesday, Nov. 28. The presentation will begin at 3:35 p.m. Mountain Time and will include comments from Matt Cagwin, Chief Financial Officer. Investors and interested parties will be able to listen to the investor presentation via webcast from www.westernunion.com, under the investor relations section. The archived webcast will be available short.

Western Union to Present at the UBS Global Technology Conference on November 28

Western Union reported a revenue of $1097.80 million, up 1% compared to $1089.60 million in Q3FY22. The comparison of the forward P/E ratio of 5.81x with the sector median of 8.56x shows WU is undervalued. With a capital return of 47.3% and dividend yield of 8.01%, investors can expect a total return of 55.31%.

Western Union: Buy This Stock For 8% Dividend Yield And Potential Upside

Western Union is a global leader in cross-border money transfers and has proved a disappointing investment. The company has been facing challenges due to the rise of digital payment platforms. WU has been focused on a digital transformation and has made some progress but has a long way to go.

Western Union: Value Play Or Value Trap?

Paysend, a card-to-card and international payments platform, and Western Union, a provider of cross-border money movement and payment services, have partnered on cross-border money transfer services. This collaboration aims to provide seamless and efficient cross-border money transfer capabilities to customers using Western Union's digital platform, the companies said in a Monday (Oct. 30) press release.

Paysend and Western Union Partner on Cross-Border Money Transfer Services

The CE 100 Index lost 2.5%, as payment-related names led to the downside. The Pay and be Paid segment was the worst performing sector, sliding 4.9% through the week.

CE 100 Loses 2.5% as Western Union Leads Payment Names Lower

Western Union edged out estimates and raised its guidance modestly. Investors still seem to doubt the company's turnaround strategy.

Why Western Union Stock Was Falling Today

Western Union (WU) expects adjusted EPS to be in the range of $1.65-$1.75 for 2023.

Western Union (WU) Q3 Earnings Beat on High C2C Transactions

Western Union, a provider of cross-border money movement and payment services, has focused on digital conversion to enhance its services and improve customer experiences. The company's third-quarter results released Wednesday (Oct. 25), show growth of 3% in its branded digital revenue year over year (YoY) for the quarter ending Sept.

Western Union Sees 3% Revenue Growth in Digital Business

Although the revenue and EPS for Western Union (WU) give a sense of how its business performed in the quarter ended September 2023, it might be worth considering how some key metrics compare with Wall Street estimates and the year-ago numbers.

Western Union (WU) Reports Q3 Earnings: What Key Metrics Have to Say

The Western Union Company (NYSE:WU ) Q3 2023 Earnings Conference Call October 25, 2023 4:30 PM ET Company Participants Tom Hadley - Head, IR Devin McGranahan - CEO Matt Cagwin - CFO Conference Call Participants Tien-Tsin Huang - JPMorgan Jason Kupferberg - Bank of America Will Nance - Goldman Sachs Andrew Schmidt - Citi Timothy Chiodo - UBS Ramsey El Assal - Barclays Bryan Keane - Deutsche Bank James Fawcett - Morgan Stanley Cristopher Kennedy - William Blair Operator Good day, and welcome to the Western Union Third Quarter 2023 Results Conference Call. All participants will be in listen-only mode.

The Western Union Company (WU) Q3 2023 Earnings Call Transcript

Western Union (WU) came out with quarterly earnings of $0.43 per share, beating the Zacks Consensus Estimate of $0.38 per share. This compares to earnings of $0.42 per share a year ago.

Western Union (WU) Surpasses Q3 Earnings and Revenue Estimates

DENVER--(BUSINESS WIRE)-- #crossborderpayments--The Western Union Company (the “Company”) (NYSE: WU) today reported third quarter 2023 results. The Company's third-quarter revenue of $1.10 billion grew 1% on a reported basis, or 7% on a constant currency basis and excluding the contribution from Business Solutions, compared to the prior year period. Argentinian inflation benefited revenue by approximately three percentage points. “Third quarter results exceeded our expectations and demonstrate a continued positive tr.

Western Union Reports Third Quarter 2023 Results

Western Union's (WU) third-quarter results are likely to reflect improved performance in the Other segment and lower operating costs.

Can Lower Transactions Affect Western Union's (WU) Q3 Earnings?

DENVER--(BUSINESS WIRE)--The Western Union Company (NYSE: WU) announced today that Chief Executive Officer Devin McGranahan and Chief Financial Officer Matt Cagwin will host a webcast and conference call to discuss third quarter 2023 results on Oct. 25, at 4:30 p.m. ET. A press release highlighting the financial results will be issued at approximately 4:05 p.m. ET the same day. The webcast and presentation will be available at https://ir.westernunion.com. Registration for the event is required,.

Western Union to Release Third Quarter 2023 Results on October 25

The Cencosud partnership is expected to enable customers in Chile to utilize Western Union's (WU) network and send money to more than 200 countries.

Western Union (WU), Cencosud in Chile Team Up for Remittances

SANTIAGO, Chile--(BUSINESS WIRE)--Cencosud, one of the leading retailers in the Americas, and Western Union, a global leader in international money transfer services, announced a partnership for sending remittances abroad. This new service is being implemented in Jumbo and Santa Isabel supermarkets in Chile and will enable customers to send money quickly and securely to more than 200 countries around the world. "This agreement reinforces and strengthens Western Union's presence as a leader in r.

Western Union and Cencosud Announce Partnership to Send Remittances Abroad Through Jumbo and Santa Isabel Supermarkets

CASABLANCA, Morocco--(BUSINESS WIRE)--Consumers can now use Western Union services to send donations to the Government of Morocco's special fund in support of victims and relief efforts.

Western Union Enables International Money Transfers for Morocco Earthquake Victims and Relief Donations

The Western Union Company (WU) reached a significant support level, and could be a good pick for investors from a technical perspective. Recently, WU's 50-day simple moving average broke out above its 200-day moving average; this is known as a "golden cross.

Should You Buy Western Union (WU) After Golden Cross?

DENVER--(BUSINESS WIRE)-- #crossborderpayments--Suzy Deering Appointed to Western Union's Board of Directors.

Suzy Deering Appointed to Western Union Board of Directors

Enterprise Products Partners

Altria

Dividend stocks are the best way to build wealth, which is why you should look for ultra-high yield stocks. The asset managers at Hartford Funds looked at the benchmark S&P 500 going all the way back to 1930 and found there hasn't been a single decade where dividend stocks didn't produce positive returns.

3 Extraordinary Ultra-High Yield Stocks to Buy Hand Over Fist

TRIPOLI, Libya--(BUSINESS WIRE)--Western Union Supports Relief Efforts in Libya.

Western Union Supports Relief Efforts in Libya

Western Union (WU) collaborates with Elektra to enable Banco Azteca account users in Mexico to seamlessly collect money sent from the United States through mobile phones.

Western Union (WU) to Ease Mexico's Electronic Money Transfers

DENVER--(BUSINESS WIRE)-- #crossborderpayments--The Western Union Foundation today announced Prosperity Beyond Borders, its new social impact commitment to drive $500 million in aggregate wage gains for people who currently lack access to economic mobility. Prosperity Beyond Borders is a multi-year commitment supporting individuals who have migrated from underserved communities and connecting them with the skills and access necessary to attain better jobs and increased earnings. “The Foundation's goal of driving $500.

Western Union Foundation Announces Commitment to Drive $500 Million in Wage Gains

CASABLANCA, Morocco--(BUSINESS WIRE)--Western Union Supports Earthquake Relief Efforts in Morocco.

News for Western Union Stock (WU)