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Market Wisdom

Is Western Union Making Money?

Last week I noted that The Western Union (NYSE: WU) is enjoying some rare market growth with the help of Apple Pay. The Mercator Advisory Group found that around 29% of Western Union customers also used Apple Pay.

This is more than the double the number of iPhone users that have tried Apple Pay, Payments Source noted. Only around 13% of iPhone owners have tried the digital wallet.

Such numbers have prompted The Western Union to start accepting Apple Pay at its wire transfer offices in the United States. The company is also working to support Apple Pay’s main competitors Android Pay and Samsung Pay and to support such mobile apps in the United Kingdom.

Western Union is also experiencing significant revenue growth at its website, Payments Source reported. Transaction volume at increased by 28% between the third and fourth quarters of 2016; revenues from the site grew by 27% during the same period.

The Value Argument for Western Union

All this got me wondering if Western Union is a value investment because it is tapping new sources of revenue others are not seeing. That is enabling persons who use Apple Pay to buy boring old fashioned money orders and send wire transfers.

There is a potentially huge market here because of remittances payments; the money immigrants to developed nations like the United States to the folks back home developing countries like Guatemala and Nigeria. The business is huge; the World Bank estimated the total value of remittances sent in 2015 at $431.6 billion. The Bank also found that the value of such transfers has doubled in the last decade.

How Apple Pay can Help Western Union Grow

Apps like Apple Pay might allow Western Union to expand its business because they would enable people to buy its products with bank account and credit card balances. All four of the major credit card brads; American Express, Visa, MasterCard and Discover, and thousands of banks and credit unions in the United States support Apple Pay.

When a person uses Apple Pay he or she does not have to take a large hunk of cash into the Western Union office. This spares a person the hassle of having to go to the bank and get the cash.

It also helps them avoid the risk of carrying a lot of cash around which can attract muggers. Since a lot of Western Union offices are located in less than respectable neighborhoods and criminals know people who go into them carry cash that’s a big risk.

Future revenues might be higher because there are plans for PayPal to support Alphabet’s answer to Apple Pay, Android Pay in the United States. Since Android is the world’s most popular smartphone operating system, it’s on 107.7 million devices in the United States alone, according to Statista the potential market is huge. Not surprisingly Western Union has plans to start taking Android Pay in its stores in the future.

Shrinking Revenues at Western Union

Despite that potential Western Union is not necessarily a value investment because of shrinking revenues. WU’s revenues fell by $57 million over the course of 2016; it started the year with $5.484 billion in revenues, and finished with $5.423 billion.

My guess is this represents the effects of all the competition in the money transfer sphere. Western Union is facing aggressive competition from PayPal Holdings (NASDAQ: PYPL) and its’ Xoom subsidiary, MoneyGram International (NYSE: MGI) and Walmart (NYSE: WMT) which is offering its own money transfer service.

New electronic money transfer solutions such as bitcoin and PayPal’s Venmo product are also a direct threat to Western Union. Such services are faster, cheaper and often more convenient users do not have to go to a branch to send or receive money. They can also transfer cash directly into a bank account or use it to buy a gift card.

Does Western Union Make Money?

Western Union is also making a lot less money from its business. The company saw its net income fall by $584.6 billion during 2016.

WU started the year with $837.8 million in income and finished with $253.2 million. If that income drop continues, Western Union might be operating at a loss in just a few months.

Nor was it just net income that is shrinking at Western Union. The company reported a negative profit margin -25.88% at the end of fourth quarter 2016. There was also a free cash flow of just $167.2 million.

Western Union is not making much money but it still has some float. The company reported assets of $9.42 billion, cash and short-term investments of $2.109 billion and cash from operations of $1.042 billion at the end of 2016.

What is Going on at Western Union?

What is going on at Western Union, why is the company still generating float, while its income is falling. The answer is simple being in a cash business; Western Union is still able to accumulate a lot of float through the nature of its business people have to pay cash for its products.

The problem is it is selling less of those products and earning less profit from them. A major problem that companies like Western Union face is that the people who send the largest amounts through wire transfers are the most likely to adopt new technologies like bitcoin.

That leaves Western Union stuck with older, poorer and less sophisticated customers whose numbers will decline over time. It also shows why WU is so anxious to adopt new technologies such as payment applications. This is one company that desperately needs new customers.

Pedestrians pass a sign for the Western Union Co. outside a bank operated by Ecobank Group in the Remera district of Kigali, Rwanda, on Wednesday, Sept. 18, 2013. Coffee-producing Rwanda’s economy has doubled in size in the nine years through 2010, according to the World Bank. Photographer: Will Boase/Bloomberg via Getty Images

Is Western Union a Good Investment?

That reality makes Western Union a poor investment even though it had a return on equity of 20.26% on December 31, 2016, and paid a dividend of 17.5¢ on March 15, 2017.

There’s no way either of those numbers can be sustained with the income dropping at Western Union. I would say stay away from this stock because its share value is going to sink fast.

Most likely we’ll see large scale drops in share value and income at Western Union. That will make it an acquisition target because the Apple Pay success proves its ecosystem still has some value.

My prediction is that Western Union will be acquired by a company like PayPal or Ant Financial in the near future. Ant Financial, the force behind Alipay, already tried to buy MoneyGram earlier this year.

Either Ant or PayPal will try to buy Western Union at some point to give their customers another payment channel. Ant is a likely suitor because that company wants to expand its presence in the United States and Europe.