Special Situation Investing

Sunday, January 28, 2007

Western Union (WU) - Took a Position

I established a fairly sizable position, relative to my account size, in Western Union (WU) this week. Western Union is a stock that I had mentioned some months ago when it was first spunoff but which I never actually got into. I've been regretting that decision. It went down right off the starting block and while I wanted a piece I was trying to time the thing. Generally, I never try to time the market, I hate market timers but I did in this case and the stock subsequently took off from $18 to over $24. Well it's started coming back down and I decided to get in when it hit $20.95.

I purchased the stock for my taxable account as I view it to be a solid long-term holding. The company is the dominant player in the North American money transfer business and up there in the rest of the world. It has operaitons in 200 countries, with 285,000 locations. This gives it an advantage of scale and barriers to entry. It earns fat operaring margins of 30%, is growing at ~12% and has a reasonable debt load post-spinoff.

Currently it trades for a P/E of ~18. While this doesn't seem cheap, if the company can perform operationally, continue to grow, pay down debt, repurchase stock basically just take care of business, the P/E will expand. There is no reason that this company couldn't fetch a 25-30 P/E given the 'relatively' low cyclicality. That potential pop in the P/E, in addition to earnings growth (assume 10% per year), share repurchases (2% of net outstanding shares per year), could allow the company to quadruple in size over the next 10 years. That would translate into yearly annual gains of ~14.5%. In reality, the results will differ materially from my expectations but potentially in either direction. For a taxable account where I don't want to be trading, I view the likelihood of the results and the potential returns excess over fixed income to offer an atttactive entry point.

Beyond that, check out the latest quarterly results here.


  • I've to say good timing (1/29/07 9:30am PST). I think WU fair value is around 30 to 32, and I'm trying to buy it at 18 (40% discount). In a shameless wishful thinking I would love to see WU drop to 18 so I can get in.

    Keep up the good work!

    By Anonymous Anonymous, at 9:35 AM  

  • Do you really think a Co. growing earnings at a 10% rate deserves a 25 - 30x multiple? I'm also afraid of irrational pricing at Moneygram which could hurt margins in the future.

    By Anonymous Anonymous, at 7:10 AM  

  • Could not agree more, looking at the PEG and sales projections for next fiscal yr, WU is poised for a decent run-up. The P/E is relatively valued compared to the future earnings potential. A great company with a solid business model.

    By Anonymous Anonymous, at 2:34 PM  

  • In regards to the second comment, I am not saying that I would pay 25-30x earnings for WU. However, the market very well might. Look at Sysco (SYY), it garners a 25 PE in a slow growth industry. Coca-cola used to fetch MASSIVE multiples in the 40-50 range. I am not relying on expanding PE ratio's, that is just icing on the cake. Ultimately, when I start to lose interest in the company I wait for one of these PE expansions and sell at that point.

    By Blogger spinoff, at 4:17 PM  

  • With modest gain of 10% growth DCF fetch around 32. 3X larger than nearest rival. Instituition ownership 6% around the day you bought it 7.2% now. Oakmark Fund didn't sell it, Berkshire didn't sell it. MorningStar rate WU 5 star, fair price 32. It's pretty safe to buy below 25. I'm with you spinoff.

    By Anonymous Anonymous, at 8:03 PM  

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