YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Western Union

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Even though the broad market has rebounded sharply, it does not mean every stock has moved in concert. One such example is with Western Union, the world’s largest global money transfer business. Much of their business stems from immigrants who come from poorer nations to wealthier nations and send money back home to their family members. With a high proportion of their revenues coming from the Hispanic population, a major concern is the slowdown in manual labor (such as home construction) as well as risks of reform to immigration laws. Another concern is the possibility of other methods being introduced for sending money, such as new technology of sending money straight from cell phones. This, however, is likely much farther down the road, especially since targeted customers are immigrants that do not have bank accounts and are not as quick to embrace the latest technological gadgets. Of course, stagnant job growth and a slower economy also threaten the volume and size of transactions. However, remittances worldwide have held up well, likely because most of their customers are not sending back money for discretionary purchases, but money for basic necessities.

Western Union has locations in more than 200 countries and territories creating a network effect, a phenomenon where the value of a product or service increases as more and more people adopt it. Their network is three times larger than their next competitor, MoneyGram, and they process nearly five times more transactions. Yet, while they maintain the highest market share in cross border remittance, it is still only 18 percent, allowing plenty of room for growth. Western Union’s expansion potential is very large in emerging markets such as China, India, and the Philippines. Their brand is the most recognizable in the industry, making new entry difficult for those without a network effect. Their strong brand also helps give them pricing power, or at least allow them to grow volume faster than price declines.

Moreover, this high market share provides scalability because both fixed costs and variable costs are very low. They are a highly profitable company with operating margins of 27 percent, twice that of MoneyGram. Their extremely low capital requirements allow them to return their enormous cash flow back to shareholders.

Before the market crash, the company traded around 20 times earnings and currently is near the lowest ever at about 12 times next year’s estimated earnings, compared to approximately 17.5 for other data service companies.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | February 12, 2010 | Permalink

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