Arvind Mallik and Jonathon Fite presented their in-depth investment thesis on Western Union (NYSE: WU) at Wide-Moat Investing Summit 2014.
Western Union: “World dominator” of the global money transfer industry. Core franchise is cash-based consumer money transfer, but WU also has fast growing online and mobile capabilities and recent acquisitions are enabling B2B capabilities. Sources of moat: 1) trusted brand; 2) economies of scale); and 3) network effect (500k+ agent locations, 100k+ ATMs, 200+ countries). This leads to revenues and net income of 4x and 15x greater than the next competitor Moneygram. At the recent valuation (FCF yield of ~10%), the shares are priced for disappointment. What’s making WU shares cheap? 2013 revenues were down 2% y-y as the company surprised investors with aggressive pricing cuts in late 2012. Regulatory and compliance requirements jolted investors (again) in 2013 with unexpected costs (incremental burden of 3%+ of revenue). Newer entrants (e.g. Xoom.com, Bitcoin, Walmart) also led to concerns about the moat. Fite and Mallik believe these are all solvable problems the company is already addressing (revenue growth is back with 4% constant currency growth in Q1; cost savings aimed at offsetting compliance costs; fighting competition with WU.com, growth accelerated to 45% in Q1 and WU likely to offer “instant” ACH online transfers this year). As the company mitigates the recent margin drag and restores growth, the stock should re-price to $29+. Another positive is capital allocation (reduced shares outstanding by more than 25% since 2008) and incentives (CEO Ersek owns 1.8M shares, 30X salary, bought when shares fell).
About the instructor:
Prior to founding KMF Investments, Arvind Mallik was a Senior Manager in the Strategy practice of Accenture LLP. At Accenture, he helped leading global companies formulate and execute strategies to enter new market segments, develop innovative new services and solutions, and reduce their operating costs. He has also advised clients in navigating complex change initiatives, including mergers and acquisitions, and business process outsourcing. He brings a strong background in value analysis and understanding of opportunity areas for companies to improve their returns to shareholders. Arvind obtained a BS in Chemical Engineering and BS in Bioengineering from UC Berkeley, and an MS in Chemical Engineering from MIT. He graduated with highest honors from both institutions.
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