Western Union and MoneyGram Value Traps?

Cash in Western Union Stock?

Western Union $WU has all the makings of a value trap investment. This research article will focus on Western Union but much of it is equally applicable to $MGI MoneyGram. Western Union stock is, on a superficial basis, very attractive for a portfolio, yet it contains danger. Any analyst research report should discuss these issues. On balance, I decided that this stock was not worth buying. Having said that, it is worthwhile to articulate the risk and reward profile of this stock in order to monitor.

Western Union Profit Drivers

The stock actually has a number of things going for it. I will outline these points in the context of the results. Western Union has...

• Good exposure to the expected rise in employment this year
• Very favourable demographic trends of globalisation and migrant workers
• Increasing utilisation of technology to capitalise on the potential of things like pre-paid cards and mobile money transfer
• An expanding network of 80,000 agents and 16,000 corridors and a global leading position in money transfers
• Highly cash generative business model

It's not hard to see why many would conclude that Western Union is a great stock to buy. As employment picks up in the developed economies, the kind of low level service personal that uses Western Union services will see an increase in income. Furthermore, increasing growth encourages more migration and this helps Western Union in its remittance business. For example, around 9% of Western Union's business involves remittances from USA to Mexico and, 85% of revenues are c2c. Putting all of these things together and, it is likely that Western Union will see a lot of potential upside this year.


Western Union Growth Strategy

Essentially, Western Union flourishes in environments whereby its customers do not have access to existing banking facilities. This is why international remittances of lowly paid workers are the core business for the company. Whilst this end market is guided by macro economic considerations (as discussed above) it is also being affected by technological changes. Western Union are seeking to stay ahead of the technology curve by expanding sales of pre-paid cards and establishing a long term position in mobile money transfer.

This is laudable but, I think, will prove challenging for Western Union. The world is full of companies of who, in recent history, suffered as their business models became obsolete as a consequence of technological changes. What is surprising, is how quickly these companies succumb to these pressures. Similarly, Western Union and its main competitor MoneyGram are facing significant challenges.


The Future of Money Transfers?

Here are five main challenges to companies like Western Union and MoneyGram. Most of which are coming from technological developments that threaten the core business of these companies

1. Increasing banking penetration in emerging markets, for example, Latin American banks servicing workers with branches in US
2. Email transfer banking and internet based transfers
3. Micro Finance companies (many which are non-profit) expanding activities/lending in emerging markets
4. Mobile phone based transfer payments
5. The Federal Reserve may force them to fully disclose fees and exchange rate charges, in line with the Dodd-Frank laws

Every one of these factors is a long term threat to Western Union. Whilst the results and conference call contained many positives, the 2-4% drop in pricing is a cause for concern. Western Union's management are arguing that this is part of a strategy to win market share via promotions.

However, I have my doubts. I think the company is trying to stem back the advance of inevitable technological change. History does not look too kindly on companies that have tried to do this.


Western Union Evaluation

Listening to the latest conference call, it is clear that Western Union expects to generate between $1-1.2bn in free cash flow for 2011. Analyst consensus is for EPS of $1.51 and operating margins are expected to expand by 100 basis points to 27%  The forecast EPS growth of 6.3% is not great but should be put in the context if a higher tax rate (impact forecast at negative 6-8c for EPS) plus $50m or 6c negative impact from restructuring charges. Adding these effects back in would give EPS growth of 15%

With an EV of $15bn and a stock price of $21.4 this would put Western Union on a forward FCF/EV of 7.3% and a PE ratio of 14.2x which is attractive. Furthermore, Western Union is set for positive upside from employment gains and a growing economy. The management is doing all the right things in engaging in share buy backs and looking to return cash to shareholders.

All of this is fine and, short term I would expect the stock price to go higher. However, longer term there are structural challenges here and I don't like trying to time when they are going to hit.

I'll take a pass on Western Union.





Source:

Bloomberg Website "Western Union, MoneyGram May Lose as Fed Sets Remittance Rules"  (Accessed 14 Feb 2011)

Tupperware Still Looks Cheap Despite the Rise

Tupperware Driven by Emerging Markets

Emerging Markets play Tupperware gave great results and, the stock is up handsomely but I think they are still cheap. The company was first featured in an in depth article here

 I will refer to this article in making this update.

Initially, looking at the headline results

• Q4 Revenue of $655m vs. $643.8m estimates
• Q4 Adj diluted EPS of 138c vs. 128c estimates

Guidance

• Q1 Adj diluted EPS of 81-86c vs. 84c estimates
• Full Year Adj diluted EPS of 423-433c vs. 416c estimates

Tupperware Results Show a Two Speed Situation

The key points to note about these results are

• Emerging market growth is very strong
• Established markets growth is showing consolidated decline
• Beauty North America has been restructured successfully
• Beauty International showing strong growth
• Gross margins steady despite sales shifts
• Very strong cash flow generation

As noted in the previous article, the largest single segment is Europe which is demonstrating consolidated declines. For the quarter, Europe segmental profit was down to $57.9m from $62.7m. However, this story is somewhat mixed because South Africa and Turkey are both included in this region. They reported 31% and 39% local sales growth respectively.

The decline in established markets cannot be hidden

(In millions except per share data)
	13 Weeks Ended Dec 25, 2010						13 Weeks Ended Dec 26, 2009
	Reported		Adj's		Excl Adj's		Reported		Adj's		Excl Adj's
Segment profit
Europe	$    57.8		$   0.1		$     57.9		$    62.6		$    0.1		$     62.7
Asia Pacific	34.4		0.2		34.6		28.3		0.3		28.6
TW North America	13.9		-		13.9		13.5		-		13.5
Beauty North America	19.5		0.4		19.9		15.4		0.5		15.9
Beauty Other	14.6		0.3		14.9		7.5		0.4		7.9
	140.2		1.0		141.2		127.3		1.3		128.6

Asia reported stellar growth and is off setting weakness in Europe. Within Asia, India and Indonesia reported particularly strong growth.

Tupperware North America reported good sales growth and the business was restructured in Mexico, producing better marginal returns.

Similarly, Beauty North America has seen restructuring lead to strongly increased profitability, even though sales the quarter were only up 1% locally from last year. Beauty International reported sales up 16% in local currency and segmental profit up 95%

Tupperware Still a Stock to Buy?

I will reduce due to position weighting but I still think there is good growth in the stock price. Tupperware’s emerging markets business (56% of sales) went up by 15% in local currency, whilst established markets were down 2%. These numbers tell you most of what you need to know about this business. There is a structural shift happening in Tupperware’s revenues and profitability.

Whilst established markets are in decline, Tupperware has demonstrated that they have a relatively recession proof business model. This is particularly interesting for a hedged portfolio because Tupperware will outperform if a ‘double dip’ happens, however they still offer growth potential if the global economy continues to improve.

Moreover, they convert cash very well and have generated $246m in free cash flow for 2010. This puts them on a FCF/EV evaluation of 7.64% This is cheap for a business set to grow revenues at 6-8% and EPS at 18%

In addition, Tupperware is making all the right noises about increasing dividends in line with earnings growth and making share buybacks. There is more room to run here.

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Nichols Update Sees Vimto Sales Expanding

Nichols plc gave a strong trading update today. It is a stock that we featured with an article in the following link found here    This update will be based on that write-up so please refer to it.

Nichols is an attractive stock to buy principally because they are ;extracting the full value from the Vimto brand, achieving margin expansion within distribution, and finally Vimto overseas sales will be strong over the next ten years because Ramadan will take place in the summer in that period.


Nichols Trading Statement

Today's trading statement can be found here and brokers have been keen to upgrade them recently. Nichols reported

Full year 2010 revenues are once again well ahead of our internal plans, with operating margins that will be in line with plan.  The Group's balance sheet has been strengthened and underlying cash generation will also be ahead of expectations.

In overall terms we expect the Group's profitability for the year to 31 December 2010 to be significantly ahead of last year and ahead of current market expectations.

I've run some rudimentary numbers based on the interim results and the previous article in Earnings View, to which I linked into in the first paragraph. Given 16% sales growth (which their broker predicts) it looks like 2010  revenues will come in at 83.9m as against the previous consensus of 80.4m

The stock currently trades at 480p with a market cap of 176m. Assuming margins are the same as in H2 of 2009 this will give operating profits of 15.3m and net profits of 10.7m and this gives full year EPS of 10.7m/36.52m=29.2p This would put them on a PE ratio of 480/29.2=16.4

In terms of free cash flow, I would assume ramped up capex for next few years of 600k and cash flow conversion of 100% and this would give 10.1 or a free cash flow yield of 10.1/176=5.7%

Assuming 5% revenue growth for 2011 (possibly conservative) and similar metrics gives 2011 EPS=30.9 and free cash flow of 10.66m

Nichols a Stock to Buy?

For this kind of business I would like to pay around 5.5% forward free cash flow yield. There is upside potential from Cherry Vimto and international sales, but also downside potential from competition and rising food costs. Nevertheless, I think 10.66/.055=193m or around 528p is a fair price for this stock.