The Western Union

Western Union's second-quarter results faltered, and management pointed to a more difficult near term as the industry's shift toward digital transfers accelerated.

Why it matters: Overall adjusted revenue declined 1% year over year during the quarter, with a 3% decline in the core money transfer business partially offset by a 12% increase in the consumer services segment. Management believes that political issues have accelerated the ongoing industry shift toward pure digital money transfers, which generate lower revenue and profitability than cash transfers. While this is not a new issue for the company, the stress on the company's results picked up significantly in the second quarter and will likely remain an issue. Revenue growth for branded digital transfers held at 6%. We remain concerned that the company has not been able to increase the rate of digital revenue growth, and we don't believe the current level of growth will allow for overall growth over time.

The bottom line: We expect to lower our $11 per share fair value estimate for the narrow-moat company by about 20%. While we had already modeled ongoing stress on the business from the industry shift to digital transfers, the impact appears to be hitting more quickly than we had anticipated. Adjusted operating margin declined to 15% from 19% last year. Management's guidance suggests margins will remain under pressure through the end of the year. The company is initiating further cost reductions to combat this pressure and expects $50 million in annual cost reductions by year-end. While we appreciate management's efforts, we think the fixed-cost nature of the business means that margins will remain under pressure absent top-line growth.

Western Union had initially expected to close its acquisition of Intermex in the second quarter, but that deal has been delayed. Management's guidance now assumes that the deal closes in September. Following this deal, leverage will be somewhat elevated given lower expected profitability, and management intends to suspend share buybacks until debt/EBITDA is back within its historical range of 2.5 times-3.0 times.

We think the company should still have the capacity to service its ample dividend, and management reiterated its commitment to the dividend on the call. However, we wouldn't completely rule out a reduction in the dividend to improve financial flexibility if the stress on the business worsens further.

We are reducing our fair value estimate for Western Union to $8.50 from $11.00 per share, as recent results suggest the industry shift toward digitial transfers will have a material negative impact more quickly than we had previously anticipated. Our fair value estimate equates to a 2026 price/adjusted earnings multiple of 6.4 times.

The impact of the coronavirus pandemic led to a revenue decline in 2020, and while the company then saw a bit of a bounceback, headwinds reemerged as the company sought to restore share through pricing actions. This has led to further revenue declines recently. Lapping a one-time spike in transactions in Iraq was an additional issue in 2024. Additionally, domestic efforts to curb immigration are affecting money transfers out of the US, which will pressure the company's top line in the near term. In the longer term, we think the company can stabilize its operations. In the back half of our projection period, we forecast mid-single-digit transaction growth partially offset by modest pricing declines. This results in marginal revenue growth in the back half of our projection period, as a modest decline in revenue in the money transfer segment is offset by growth in newer areas. The net result of our assumptions is a 3% revenue CAGR over the next five years, or essentially flat if we exclude the pending International Money Express acquisition.

Excluding one-time items, Western Union's margins have held fairly steady over the past five years, following some compression after an uptick in compliance costs. The company initiated a cost-reduction plan that has modestly improved margins, with the impact of the coronavirus and recent pricing actions being an offset. However, recent results suggest the company will see significant margin pressure in 2026. While the company is intiating another round of cost reductions (with a target of $50 million in annual savings), we think margins will reset at a lower level. Our forecast assumes that operating margins will be 14% in 2030, approximately 5 percentage points below the company's average over the past five years.

We use a cost of equity of 9% in our valuation. Due to our concerns over the company's ability to grow long term, we use a 5.3 EV/EBITDA multiple at the end of our five-year projection period to value the company. This multiple is roughly in line with the price Western Union recently paid for peer International Money Express.

Western Union is the largest player, by far, in an industry where size confers significant benefits. We see three potential advantages arising from the company’s size. First, we think Western Union has historically been able to maintain premium pricing in some corridors, resulting in an intangible asset advantage. Second, we think the company’s size has allowed it to pay relatively low commission rates to agents, as it could offer relatively high volumes as an offset, creating something of a network effect. Finally, we think the scalable nature of the business creates a cost advantage for an industry leader like Western Union. We think the first two competitive advantages (premium pricing and lower agent commissions) have eroded to a point where they no longer meaningfully contribute to the company’s economic moat. However, we think Western Union’s scale advantage—which, in our view, has always been the primary moat driver—remains in place. As result, our moat rating is narrow.

The money transfer business is highly scalable because the incremental costs of processing additional transactions are minimal. Agent commissions (about 35% of revenue) are variable, but beyond commissions we believe most costs for money transfer operators are fixed. Western Union generates almost three times as much revenue as its closest competitor, giving it a marked cost advantage over its rivals, and its operating margins historically have been significantly higher than its peers. We think the company's scale advantage has always been the most significant driver of its economic moat.

A major issue for Western Union in recent years has been the industry shift toward digital transfers. In our view, the competitive dynamics of digital transfers remain consistent with cash-based transfers, with size and the resulting cost differential being the primary consideration. Therefore, we see maintaining overall share across all channels as the primary factor in reinforcing Western Union’s moat. As such, we believe that Western Union has responded appropriately to this shift, having invested relatively aggressively to build out its presence in digital channels. Western Union generates about a quarter of its revenue from branded digital transfers and we believe the company (in terms of revenue) is one of the largest digital money transfer operators.

We also see the company’s physical agent network as an advantage in digital transfers, given that we believe most digital transfers, while digital on the send side, remain cash-based on the receiving end. Western Union estimates that 70% of its digital transactions are cash-out on the receive side, and even digital-focused players such as Remitly and Xoom maintain physical receive agent networks. Money transfers typically flow from developed to developing economies, and most developing economies remain primarily cash-based.

However, more recently, Western Union’s digital revenue has declined, and the company is increasing spending on ancillary services such as digital wallets and digital banking to build out a more holistic service and lure customers back. These moves suggest the digital side of the business potentially should be viewed in the wider context of person-to-person payments, an area populated with significantly larger competitors. We think cross-border money transfers are very difficult to service given varied but generally heavy regulatory requirements around the globe, and PayPal’s lack of success with its Xoom acquisition implies that even large payment companies may struggle to build out truly global money transfer offerings. Still, we do see some uncertainty around this industry evolution.

The demographic factor that has historically driven money transfer growth—namely, the differential between population growth in developing and developed countries—remains in place for the foreseeable future.

Western Union didn't see a major dropoff during the last recession or the pandemic, highlighting the stability of the business.

While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentives to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

A stricter stance on immigration in developed countries could limit immigrant populations and reduce their employment opportunities and money transfer volume.

Alternative channels for sending money, such as stablecoins, could cut out money transfer companies like Western Union.

Weak macro conditions, a stronger dollar, and operational missteps have kept Western Union's growth low over the past decade, and there is no clear path to significantly higher growth.