Western Union (WU) Delivers Ahead

Western Union Co.’s (WU) second quarter earnings came in at 37 cents per share ahead of the Zacks Consensus Estimate of 32 cents. The company has experienced strong transaction growth in the Americas, along with improving international trends. Earnings also compared favorably with the prior-year quarter, when the company had earned 31 cents per share.

Western Union’s revenue for the quarter of $1.3 billion came in line with the Zacks Consensus Estimate and was up 2% year over year. On a constant currency basis, revenues were up 3%, primarily due to a 28% consumer-to-consumer (C2C) transaction growth in the domestic region.

Operating income was down 1.1% year over year to $345.5 million. Operating margin declined to 24% compared with the prior-year quarter’s margin of 27% as the company made substantial long-term strategic investments.

Western Union has undertaken a restructuring of its operations to reduce management layers and better leverage the cost structure. Restructuring charges amounted to $35 million during the quarter. The initiative is expected to save $10 million in 2010, $30 to $40 million in 2011 and $50 million in pre-tax savings in 2012.

Expansionary Initiatives

During the quarter, Western Union

  • Tied up with a leading Turkish bank Yapi Kredi to offer money-transfer services via the 830 branches that span the country
  • Completed the roll-out of its global money-transfer service at more than 1,300 Fifth Third Bancorp (FITB) banking center locations in 12 states in the U.S.
  • Announced a venture with OMV, one of the largest integrated oil and gas groups in Central Europe, to provide money transfer services in the European region, and
  • Announced to offer its money transfer service through The Philippine National Bank, Philippines’ largest offshore bank network.

During July, Western Union tied up with Travelex to offer its international money transfer services in Japan, following the country’s new Financial Settlement Act in June 2009.

Western Union has increased its agent locations to 430,000. One year ago, the company had 385,000 agent locations. Total expenses increased 5% year over year to $962.4 million.

Segmental Performance

The C2C segment, which accounts for more than four-fifths of the company’s revenues, reported revenues of $1.1 billion, up 1% year over year. Revenues were, however, up 2% on a constant currency basis. Total transactions increased to 53 million, up 9% year over year. The quarter maintained the trend of transaction growth witnessed in the previous two quarters. Operating income margin was up to 29% from 28% in the prior-year quarter.

The Global Business Payment segment’s revenue was $179.3 million, up 9% year over year (down 8% excluding Custom House) due to softness in U.S. bill payments. Total transactions declined to 98 million, down 6.3% year over year. Operating income margin was 19%, (26% excluding Custom House), compared with 27% in the prior-year quarter.

Western Union’s prepaid card offering in the quarter was more than 500,000, with 8,000 locations offering cards. Its website westernunion.com witnessed 60% transaction growth in international markets. The company also offers mobile-based service at 60,000 locations in 17 countries.

Outlook for 2010

On the back of a strong business performance in the first half of 2010, management has upped its full-year 2010 guidance. It now anticipates 2010 EPS in the range of $1.31 to $1.36, up from the previous guidance range of $1.29 to $1.34. Currency adjusted revenue is expected to grow in the range of 0% to 3%, compared with a -1% to +2% range.

Western Union is witnessing continued momentum from its diversified operations and an improvement in transactions in the Americas. It is also aggressively expanding its global footprint, which poises it to reap the benefits of the emerging opportunities. We believe that the company’s disciplined underwriting culture and its conservative investment philosophy will help it grow in the long run. Thus we maintain a Neutral recommendation on the shares.

WESTERN UNION (WU): Free Stock Analysis Report
FIFTH THIRD BK (FITB): Free Stock Analysis Report

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