Summary
- Initial progress on Western Union’s turnaround plan is positive.
- WU stock is making large investments to modernize the business, improve its customer retention, and reorient its declining market share.
- The next few quarters will test management's execution of plans against a target of mid-single-digit EPS growth by 2024-25.
- The stock is trading at a historically cheap valuation.
Thesis
The Western Union Company's ( WU ) Q4 reflected a continued repositioning for WU, further aligning with its Evolve 2025 strategy, with an ongoing shift of focus from revenue-per-transaction to a more holistic customer relationship. The company reported adj. EPS of $0.32, with the lower-than-expected adj. EPS driven by lower operating profit. The results were also impacted by softness in the retail business as well as promo pricing designed to improve digital customer acquisition.
Western Union is in the early stages of a strategy revamp under new CEO Devin McGranahan, who aims to reposition and optimize the firm's retail network and transition customers to its digital platform. The next few quarters will test management's execution of plans against a target of mid-single-digit EPS growth by 2024-25. The company seeks to increase engagement via an omnichannel approach, optimize existing operations, and target cross selling of financial services to the "receiving" customer segment. Western Union's competitive advantages include a global network with 200-country compliance expertise and a trusted brand, but it needs to navigate a path toward a bigger target market in a lower-fee environment. My December 2023 price target of $15.8 on the stock is based on 10x CY23E P/E, at the low end of WU's average forward P/E
Post-4Q Earnings Outlook
Western Union's disappointing Q4 results pave the way for a continued, but slower, revenue decline of 2-4% this year (down 12% in 2022), largely led by weakness in retail revenue, which management seeks to stabilize over the next 2-3 years by accelerating investments. The company could keep its operating margin at 20-21% in 2023, even as 1H may need more investments in areas like sales and marketing in under-served corridors, along with cross-selling new and existing financial services to receivers of funds in key markets. The suspension of operations in Russia and Belarus will temper revenue in 1H. The new CEO's data-driven approach to reposition the retail network and transition customers to the digital platform holds promise for a mid-single-digit EPS growth target by 2024-25.
Margin to stay low near term
WU is making large investments to modernize the business, improve its customer retention, and reorient its declining market share. Priority investments include development of the WU ecosystem business, modern PoS system rollout, facility improvements at certain locations, and more. While necessary for WU's competitiveness, I believe these investments will weigh on margins in the near-term, and the cadence of subsequent margin improvement will depend on the materialization of the company's outlined goals.
Turnaround Plan in Early Days
WU's retail business continued to shrink, especially in Europe, where transactions fell by 31%, and revenues fell by 17% on a constant currency basis. Additionally, WU's digital business still experienced negative growth, but the company saw some improvements in customer acquisition and retention levels among its US digital outbound customers in the previous quarter.
WU reiterated its adjusted guidance metrics for the fiscal year 2023, which were provided at the investor day. The guidance calls for a YoY adjusted revenue decrease of 2% to 4% and an EPS between $1.55 to $1.65. However, WU assumes that there will be no deterioration in macro conditions or foreign exchange rates. The company's future plans focus on establishing a fully digital ecosystem to achieve low-double-digit growth in its digital business. However, it remains uncertain whether WU can successfully deliver financial service products like debit cards to its customer base, which would lead to increased retention and engagement.
Digital banking ecosystem unlocking financial access
Western Union plans to fill the gap in financial services for its customer base of workers by creating an integrated financial ecosystem. This will involve building a global network of senders and receivers and offering them accessible financial services that help them save, spend, and transfer funds. The WU mobile wallet will allow customers to hold funds in different currencies, potentially accrue interest, and use a debit card linked to the wallet. The company has already launched digital banking in Germany and Romania, offering an integrated digital banking solution with money transfer, a multicurrency account, and a debit card. This program reached ~150K customers onboarded during the previous quarter, and the management remains focused on expanding the financial ecosystems on additional markets. The ecosystem is expected to be primarily used as an engagement and customer retention tool, but WU anticipates generating a quarter of its revenue through the launch of debit cards in the US.
WU Progress Report Against Evolve 2025
WU released an initial progress update on the four target metrics the company outlined as priority metrics at its recent investor day . While the achievements to date present a taste of management's ability to press the ball forward, the team has more time and more momentum entering 2023 than it did in 2022. I expect retention and growth in branded digital customers to be the most financially impactful near-term and therefore receive particular focus from the company among the initiatives.
Geographical Strength in LACA
LACA posted very strong results relative to WU's other geographical segments in 2022. Management expects LACA to continue to be a bright spot for the company, as its brand is well-positioned in the region, and it has taken the opportunity to roll out new initiatives there first, where many have been successful. Initiatives that WU has tested in LACA include various digital initiatives and physical store revamps. For instance, in Brazil, only ~5% of WU's retail locations are company-owned, but those locations now account for ~50% of revenue due to their strategic placement, multiproduct offerings, and even free wifi. Management sees momentum from 2022 persisting one month into the new year.
Valuation
My December 2023 Price Target of $15.8 is based on 10x CY23E P/E, at the low end of WU's average forward P/E over the last five years despite the improved 3-year margin trajectory due to near-term headwinds and modest, long-term top-line growth profile. WU is currently trading at 8.25x of CY23E EPS, while peers are trading at 15x.
Final Thoughts
WU is making large investments to modernize the business, improve its customer retention, and reorient its declining market share. While the progress on the company's turnaround plan remains positive, the next few quarters will test management's execution of plans against a target of mid-single-digit EPS growth by 2024-25. The stock is trading at a historically cheap valuation, and I keep a December 2023 price target of $15.8 based on 10x CY23E P/E, at the low end of WU's average forward P/E.
For further details see:
Western Union: Continued Execution On Turnaround Plan Would Make Me Bullish