WU - Western Union's Return To Sustainable Growth Is A Significant Catalyst For Gains In 2024 And Ahead

2024-01-15 07:30:59 ET

Summary

• Western Union has underperformed for three consecutive years, but now is a good time to invest due to its penetration into the growing cross-border payments market.
• The company's Evolve 2025 plan and aggressive growth strategies have increased investor confidence and led to positive revenue growth.
• Western Union's low valuations, high dividend yield, and strong cash generation make it a strong stock for long-term investment.

The Western Union Company ( WU ) underperformed for the third year in a row in 2023 due to investors' concerns over its growth potential in a fintech market. However, I believe it is the best time to initiate a position in a prominent company in the fast-growing transaction and processing sector. In particular, the company's penetration into skyrocketing cross-border payments strengthens its fundamentals. Moreover, Western Union's aggressive growth strategies would enable it to capitalize on robust demand. Besides fundamentals, low valuations, high dividend yield, and strong cash generation make it a strong stock for long-term investment.

A Shift to Growth is Likely to Fuel Confidence in Stock

In my article in June 2023 when its shares were down nearly 50%, I expressed confidence in the company's Evolve 2025 plan and suggested investors buy the stock for long-term investment. I was optimistic that its 'Evolve 2025' strategy would enhance investor confidence and fuel a share price rally. In fact, the company's third-quarter performance and industry outlook increased my confidence in its upside potential. Its third quarter 7% currency-neutral growth highlights that the company has been successfully capitalizing on demand through customer acquisition and retention. I consider high mid-single-digit revenue growth a big success and catalyst for share price, given a double-digit decline in each quarter of 2022. In addition, the number of other key metrics that could play a key role in sustainable growth over the long term also improved.

For instance, customer confidence, which is key for sustainable growth, has been increasing in Western Union's services. This is reflected in nearly 100% growth in monthly transactions per active customer, growing to 8.5 from 4.5 at the beginning of the year. Its C2C transactions grew by 4% compared to a decline of 11% in the year-ago period. In Q3, its branded global digital transaction volume increased by 12% year over year and revenue growth was positive for the first time. Consequently, the company anticipates positive revenue growth in 2023 and mid-single-digit growth in 2024.

For customer acquisition and retention, its go-to-market strategy is focused on targeting the right audience, rolling out new products, offering promotional pricing, faster transactions, and immediate refunds. It is enhancing its retail point-of-sale experience and increasing the number of concept stores. The Chief Executive Officer, Devin McGranahan, stated in the conference call that concept stores generate 8 times the transactions in Europe compared to retail footprints. The company has also started offering physical cards and digital wallets. The company plans to rationalize all of their offerings into one app, which I believe would further increase customer acquisition and retention.

"We have relaunched our prepaid card in the U.S., developed and launched a digital wallet in Europe and South America, and have piloted partner-based lending solutions in Australia and Argentina. Our wallet provides a foundational set of financial services including a multicurrency bank account, P2P transfers as well as a Visa debit card, all integrated into our Western Union digital money transfer experience. Since last year, this service has been available in four countries in Europe and the last quarter we launched Friends & Family in Brazil, the largest economy in Latin America and an important digital market for us," Devin McGranahan said in an earnings call.

Margins and Cash Flows

Western Union's aggressive growth strategy slightly lowered its operating margin to 19.6% from 21.3% in the year-ago period. Despite this, higher revenues enabled Western Union to generate adjusted earnings per share of $0.43, above $0.42 in the year-ago quarter. I believe the margins are not bad as they are still in the targeted range of 19% to 21%. The margins could bounce back once the company achieves its 2025 objective. At present, given increasing demand and rising competition, an aggressive revenue and market share growth strategy appears prudent.

As of the end of September 2023, Western Union's year-to-date operating cash flow of $519 million and capital expenditure of $117 million leave a free cash flow of nearly $400 million. As its free cash flow is significantly higher than dividend payments of $263 million, there is no risk of a dividend cut. Moreover, healthy free cash flows permit it to reduce its outstanding share count, a positive factor for earnings per share and dividend growth.

Valuations and Quant Rating

Western Union's forward valuations have become cheaper compared to six months ago. The decline in valuations is due to sluggish share price performance combined with an improving financial outlook. Western Union stock is currently trading around 6.99 times forward non-GAAP earnings, down from 7.04 six months ago and a sector median of 9.96. Its forward price-to-sales ratio of 1.02 is also less than its five-year average of 1.56 and sector median of 2.68.

Its quant score is slightly lower than the buying zone due to poor grades on growth and momentum. I expect an improvement in quant ratings because the growth factor is likely to improve due to potential revenue and earnings growth in 2024. In fact, the growth trend has already begun in the third quarter of 2023. On the other hand, the rest of the quant factors, such as valuations, profitability, and revisions, support the buying strategy.

In Conclusion

As global cross-border payments are expected to skyrocket to a staggering $290 trillion from $190 trillion in 2023, Western Union is likely to be a key player in the industry with its strong brand recognition, global retail footprints, and increasing digital presence. The company's growth strategies have also been paving the path to capitalize on the growth trends in cross-border payments. Moreover, its stock offers an attractive buying opportunity while a higher dividend yield would enable investors to hold it for the long term.

For further details see: