The Western Union Co. (WU) is a payment services firm that operates globally. The company began in 1851 as a transportation service but has since evolved into a leading consumer-to-consumer payments firm, including cross-border and intra-country transfers, notes Ben Reynolds, editor of Sure Retirement Newsletter.

To a lesser extent, the company also provides business payment solutions, including foreign exchange services and bill payment solutions. Western Union generates about $5 billion in annual revenue, and trades with a market cap of $7.2 billion.

Western Union reported third-quarter earnings on November 2nd, 2021 and results were somewhat mixed, as revenue came in lower than expected, but adjusted profits were strong. Third quarter revenue was $1.3 billion, up 2% year-over-year.

Growth was led by digital money transfer, which was up double-digits once again but was partially offset by retail money transfer volumes, which have slowed since the impacts of the pandemic have waned somewhat.

Consumer-to- consumer transactions saw volume decline slightly, driving flat revenue on a reported basis, and a 1% decline on a currency-neutral basis. Digital money transfers revenue was up 15% on record volumes in terms of transaction count and principal amounts.

Adjusted earnings-per-share in Q3 came to 63 cents, up from 57 cents in the year-ago period. Growth in profits was driven by the same factors as revenue.  The company also narrowed its profit guidance range from $2.00 to $2.10 to a new range of $2.05 to $2.10; we’ve left our estimate of earnings-per-share unchanged at $2.05.

Competitive Advantage & Recession Performance

Western Union’s competitive advantage is derived from its consumer-to-consumer business, as well as its extremely long operating history, which has built brand recognition for generations. The company also has a lucrative partnership with Walmart (WMT).

The competitive landscape, however, is becoming more and more crowded as newer players take market share in the burgeoning digital payments space, so Western Union faces more competitive threats today than perhaps at any other time in its 160 years. This can drive not only volumes lower, but pricing power as well.

Western Union’s earnings hold up reasonably well during recessions, but it is still somewhat cyclical, as are all payments providers. The COVID recession produced a meaningful decline in earnings-per-share, but Western Union appears on the way to a strong recovery already.

Growth Prospects, Valuation & Catalyst

Western Union has tried to combat its very mature consumer-to-consumer business with acquisitions, as well as diversifying with other revenue streams. In addition, the company has spent heavily on buybacks. In total, we see 2% annual earnings-per-share growth in the coming years.

The stock trades today with a multiple of just 8.8 times this year’s earnings-per-share estimate of $2.05 following significant weakness in the share price. We see the stock as attractively priced as a result, driving a 6.8% gain in shareholder returns from an expanding multiple. When combined with 2% projected growth, and the 5.2% dividend yield, we see total returns at 12.8% annually.

Subscribe to Sure Retirement Newsletter here…