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Morningstar | Western Union’s Top Line Steady in 3Q, Margins Improve

Western Union's third-quarter results were solid and largely displayed the continuation of recent trends. We will maintain our $23 per share fair value estimate and wide-moat rating.

Top-line growth remained muted during the third quarter, with Western Union seeing a 1% year-over-year decline on a reported basis, and a 3% increase when excluding the effects of currency movements. Within the core money transfer business, regional drivers held largely steady, with strong growth in Latin America, modest growth in the U.S. and Europe, and declines in the Middle East and Asia. The company instituted some price cuts in the Middle East earlier this year, due to the impact of competitor pricing actions. While this has helped boost transaction volumes, revenue remains pressured, with the region seeing a 6% year-over-year decline excluding currency effects. Overall, we think the global political and macro environment will keep growth modest in the near term.

Electronic channels saw year-over-year transaction and constant currency revenue growth of 23% and 20%, respectively. We think the company’s success in these channels suggests Western Union can maintain its scale advantage despite the shift in the market. This channel now accounts for 12% of money transfer revenue, and we’re impressed by the company’s ability to maintain strong growth even as the revenue base grows.

Operating margins improved to 21.8%, compared with 19.4% last year. However, the improvement was driven by some one-time expenses last year and the timing of marketing spend. We think Western Union can hold its margins at recent levels, but that improvement will be hard to come by given relatively muted growth.

There have been rumors recently that Western Union might be looking to divest its business solutions segment. On the call, management declined to give any specifics, but noted that it is always open to any transactions that would create value. In our view, the company’s plan to build out a B2B business has simply not worked out. Growth has stalled and profitability is marginal, and we don’t see a positive path for this business at this point. Our preference would be for Western Union to sell this business if it could realize a reasonable price. However, this business accounts for a very small portion of Western Union's overall value, so the outcome is unlikely to have a material impact on our fair value estimate.