Western Union

Western Union was started in 1851 as The New York and Mississippi Valley Printing Telegraph Company this marked the start of 150 years of innovation. Five years later it would change its name to Western Union because of the Union of telegraph companies in the Western United States. In 1866 a genius inventor who used Western Union to finance some of his early inventions created the stock ticker, his name was Thomas Edison.

In 1871 they initiated what is to this day their core business: wiring money. In 1884 they became an inaugural member of the DOW.

In the 20th century they held the name of a number of firsts including: first charge card, first fax machine, the singing telegram, first domestic telecommunications satellite in space and the first company with five satellites in space.

But all this innovation was taxing to the balance sheet and Western Union underwent bankruptcy in 1994. After reorganization it was bought by First Data and in 2006 it was spun-off from First Data.

Today Western Union is a refreshed company with over 270,000 agent locations in over 200 countries and territories. Its name is synonymous with money wiring and it has twice the market share of its closest competitor.

I will analyze this company using Warren BuffettÂ’s tenets as told in The Warren Buffett Way, Second Edition.

Business

Is the Business Simple and Understandable?

Western Union operates in two businesses: Transferring money from person to person worldwide and transferring money from consumer to business worldwide.

Does the Company Have a Consistent Operating History?

While it has been around for 150 years the company underwent bankruptcy only ten years ago and has been part of FDC since then. The revenue and earnings shown over the past five years are consistent.

Does the Business Have Favorable Long-Term Prospects?

While Immigration reform in the United States could cut back on profits Western Union has more than twice the market share of its closest competitor and the means to stay a going concern for a long time. One problem could be the $3.5 billion of debt sitting on its balance sheet – this, however, can be easily resolved with the $1 billion in Cash Flow the company makes every year.

Management

Is Management Rational?

It is too early to tell for sure but judging by the ROE management seems rational at this point.

Is Management Candid With its Shareholders

So far the company has only one important filing, which because of its nature as a prospectus, is extremely informative. ItÂ’s Investor Relations site is also impressive, better then many I have seen.

Does Management Resist the Institutional Imperative?

Again it is too early to tell, but the corporate governance information on the WU Investor relations site is exceptional.

Financial Tenets

What is the Return on Equity?

Western Union has earnings of $927 million and ShareholderÂ’s Equity of $3.353 billion. This is a ROE of 28%. This is an excellent ROE showing a good business and in touch management, but it is high with a lot of debt, something Buffett frowns on. It is encouraging that ShareholderÂ’s Equity has grown almost $2 billion in the past two years.

What Are the CompanyÂ’s OwnerÂ’s Earnings?

Net income $927, the company mentions $19 million being D&A for the first six months as a standing alone company in 2006 will use $38 million, and CapEx is said to be between $200 and 225 million I will use 225 million to be conservative. This is ownerÂ’s earnings of $740 million. I will not use this number because of the uncertainty with the latter two expenses.

What Are the Profit Margins

The annual profit margins are 23.25%. This is very good, and will be high as one-time costs associated with the spin-off are paid.

Has the Company Created at least One Dollar in Market Value for every Dollar in Retained Earnings?

The company has not been public for more then a year, I would like at least five years of info for this tenet.

Value

What is the Value of the Company?

Operating Cash Flow for 2005 was $1 billion, I will use $775 million in my valuation. The analyst recommendation for the next five years is 12.5% I will 10% earnings growth over the next ten years, 3% terminal and an 11% discount. This yields a DCF value of $21.56.

Can the Company be Purchased at a Significant Discount to its Intrinsic Value?

Currently the discount is 10%, while not significant it is a discount.

Conclusion

My valuation is probably too conservative as Morningstar values them at $32/share using revenue growth and increasing margins. Also I believe Western Union will grow faster than 10%, If I up the growth to 12% the value goes to $25/share. Regardless I believe quality is more important then price and have purchased shares of Western Union and intend to hold them for as long as possible.

This article is not a recommendation to buy or sell any securities. Consult an investment professional before making any trades. The author and some members of his family own shares of WU but not of any of the other companies mentioned in this article.