Company Overview: Western Union Co. (NYSE: WU) is a money transfer and payment, solution provider. Consumer-to-Consumer and Business Solutions are two of the company's segments. The Consumer-to-Consumer operational sector supports money transactions sent from retail dealer locations across the world, as well as electronic payment systems, via websites and mobile devices. Small and medium-sized businesses, as well as other organizations and people, benefit from the Business Solutions division, which provides payment and foreign exchange solutions, particularly for cross-border, cross-currency transactions.
WU Details
Key Highlights
- Western Union Reports First Quarter 2022 Results release: Western Union Company, a major player in cross-border, cross-currency money transfer and settlements, on 28th April 2022, released quarterly earnings for the first quarter of 2022 and revised its full-year financial guidance. A drop in consumer money transfers, as well as the suspension of services in Russia and Belarus, hampered income in the first quarter.
- Completion of the first closing of its divestiture: On March 1, 2022, the company achieved the first completion of its Business Solutions divestment, obtaining the whole deal proceeds simultaneously. Assuming regulatory clearances, the second closure is set to take effect in the latter part of 2022.
- Dividend declaration and disbursement: The company announced a USD 0.235 per share quarterly dividend, which was issued on March 31st. This amounts to a USD 0.94 yearly dividend and a 5.61% yield. Western Union's current dividend payout ratio is 41.41%
- Shares repurchase program for 2022: Western Union announced on February 10th that its Board of Directors has authorized a share buyback for 2022, authorizing the firm to repurchase USD 1.00 billion in shares outstanding. This buyback permission allowed the credit services company the ability to buy up to 13.5% of its securities from the open market. Buyback plans indicated that the company's management felt its stock to be undervalued.
- Improved ROIC ratio for the company: As can be seen in the graph below, the ROIC ratio for the company increased for the first quarter of 2022. Western Union released ROIC ratio of 4.1% for the Q1 FY22 which increased from 2.4% in the same quarter of FY21.
ROIC returns from the last 2 years. Source: REFINITIV. Analysis by Kalkine group
- Downward sloping Debt/Equity ratio for the company: Company is again maintaining the same D/E ratio also closing to pre-Covid levels. The company declared a debt/equity ratio of 7.14%, which decreased more than 50% from levels of 14.76 for the same quarter in FY21. Lower debt to equity ratio means low financial leverage and Insolvency risk for the company.
Debt/Equity ratio for last 2 years. Source: REFINITIV. Analysis by Kalkine group
Key Takeaways from Q1FY22
- Increased operational efficiency: The adjusted operating profit was 21.8%, compared to 19.3% in the prior-year quarter, with Business Solutions negatively impacting the prior year by 30 basis points. The schedule of spending, product and channel mix, and foreign currency movements all led to the enhancement in adjusted operating margin.
- Marginally lower top-line financials: The Company's first-quarter sales of USD 1.2 billion were down 4% on a reported basis. A decline in consumer money transfers, as well as the termination of operations in Russia and Belarus, damaged earnings during the first quarter.
- Improved bottom-line margins: GAAP EPS for the first quarter was USD 0.74, up from USD 0.44 the year before. The profit on the divestiture of Business Solutions was partially recognized in GAAP EPS. In the first quarter, adjusted EPS was USD 0.51, up from USD 0.44 the year before. Increased operating margin and share buybacks enabled adjusted EPS growth year over year, which was in part compensated by a higher effective tax rate.
- Strengthened cash flows and healthy returns for shareholders: Western Unios Company generated cash flows of USD 200 million through operations. In the first quarter, the Company returned USD 242 million to shareholders, comprised of USD 92 million in dividends and USD 150 million in stock buybacks.
Top 10 shareholders
The top ten shareholders are listed in the table below, accounting for about 52.33% of the company's total holdings. The company's maximum stake is held by Blackrock Institutional Trust Company and The Vanguard Group Inc with 12.84 percent and 10.82 percent, respectively. The company's institutional ownership was at 63.32 percent, giving retail investors more confidence.
Top 10 shareholders of WU. Source: REFINITIV. Analysis by Kalkine group
Risk Associated with Investment
- International Trade Risk: A drop in international trade, such as increased tensions between countries, as evidenced by the current Russia-Ukraine conflict, which has resulted in the suspension of transfers to these countries, or the inability of long-term import growth rates to recover to historic levels, could harm the company's financial condition and cash flows.
- Currency and interest rate risk: WU needs to hedge its currency risk exposure due to business and currency transfers in more than 40 countries, and the current scenario with the dollar increasing comparably offers a challenging task for the company. Similarly, with USD 2.5 billion debt outstanding, interest rate risk becomes a major risk for the firm.
- Reliance on Network: The company's agent network generates most of its consumer-to-consumer revenue. As a result, any change in the relationship or attrition of agents and subagents may have a negative impact on the company's finances.
Outlook
Due to the cessation of activities in Russia and Belarus, as well as other relevant factors, the Company has modified its full-year 2022 financial projection in Quarterly 2022 results. GAAP figures reflect an anticipated incomplete year of Business Solutions shareholdings, which includes contractual payments to the purchaser totaling approximately USD 270 million for the full year, of which USD 151 million was recognized in the first quarter and the remainder in the second half of 2022, subject to regulatory and working capital revisions. GAAP sales are predicted to decline by 9 to 11 percent in 2022 while operating margins are forecast to be about 20%. For the current fiscal year, the effective tax rate is expected to be around 21%. Finally, GAAP EPS is predicted to range from USD 2.13 to USD 2.23, while adjusted EPS is likely to range from USD 1.75 to USD 1.85.
Valuation methodology: Price/Earnings Per Share Multiple Based Relative Valuation
Analysis by Kalkine group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation
Despite significant hurdles in 2022, the firm still is expected to generate a net income of USD 2 billion. We believe that its strong brand value and operational efficiency would help Western Union generate strong cash flows for 2022. Last year (TTM), the stock corrected around 33.5% with the current price being on the lower side of the 52-week range of USD 15.69- USD 26.39. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with a valuation of USD 21.43.
Considering the better-than-expectations first quarter 2022 results, key risks, financial rationales, valuation, and technical analysis, we give a “Buy” recommendation on the stock at the closing price of USD 17.43 as of May 02nd, 2022.
1-year technical chart as of 2nd May 2022. Source: REFINITIV. Analysis by Kalkine group
* Closing price as of 02 May 2022.Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.
Note 3: The report publishing date is as per the Pacific Time Zone.
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