The Western Union Company (WU) began offering its customer the ability to transfer money via telegraph in 1871, notes growth stock expert Jim Pearce, senior editor of Investing Daily's Personal Finance.
Fast forward 118 years to the present and Western Union is still in essentially the same business it was back then, except the technology for executing wire transfers is now primarily conducted online.
At the heart of the Western Union growth story is “FinTech,” or financial technology that allows a business to scale its revenue at an accelerating pace by leveraging existing hardware infrastructure with software for smartphones and other mobile computing devices.
Western Union has more than 33,000 physical locations in over 200 countries. At this point, the company realizes that it does not need to tie up more capital in additional ATMs and bricks & mortar facilities. Instead, it is investing more of its R&D budget in FinTech to maximize the number of transactions that can be processed through its existing infrastructure.
Of course, Western Union is competing with a number of Silicon Valley startup FinTech companies funded by private equity. However, none of them has nearly the reach of Western Digital in terms of retail locations, countries served, or existing users.
I believe WU can reach a share price of $30 within the next three years, an increase of 50% over its current reading near $20. I realize that a 50% gain over three years may seem relatively tame by today’s standards, but that may soon change if trade tariffs and rising interest rates take the air out of momentum stocks.
Western Union is guiding for adjusted earnings per share (EPS) of $1.80 to $1.90 for 2018. That means at a recent share price of $19, WU is valued at roughly than 10 times forward earnings compared to a multiple of 17 for the S&P 500 Index.
The company expects constant currency revenue to grow at a low to mid-single-digit rate this year while maintaining its operating margin near 20%. Numbers like that do not excite a stock market fueled by momentum, which is why its share price has dropped 10% this year.
However, 2019 should prove to be a pivotal year for Western Digital. As the company adds to its menu of digital products and expands its geographic footprint, the synergies that result could push its revenue growth up into the mid to high-single-digit range while improving its operating margin at the same time.
If so, then Western Union should achieve EPS of at least $2.15 by the year 2021. At a modest earnings multiple of 14, WU would be priced at $30.
