Evolve 2025 Sparks Digital Growth Amid Margin Pressure And LatAm Challenges

Key Takeaways

• Evolve 2025 strategy and digital expansion aim for profitable growth by enhancing transaction trends and customer experience.
  
• Strategic acquisitions and expense management focus on market positioning and reinvesting savings into growth.
  
• Macroeconomic and political disruptions, competition, and execution risks in digital financial services and acquisitions could pressure Western Union's revenue and net margins.

Catalysts

Provides money movement and payment services worldwide.

• The Evolve 2025 strategy is expected to return Western Union to a profitable and sustainable revenue growth trajectory with improved transaction trends, especially in branded digital and Consumer Services, which could positively impact revenue and earnings.
  
• Expansion of digital capabilities and improvement in customer onboarding and user experience center on Western Union's goal to achieve double-digit growth in its digital business, likely enhancing both revenue and net margins by attracting more high-quality customers and transactions.
  
• Introduction of new point-of-sale systems and debit acceptance in retail locations aims to drive higher transaction volumes and efficiency, potentially boosting both revenue per transaction and operating margins.
  
• Strategic acquisitions, such as the digital wallets in Singapore and Mexico, are designed to facilitate the growth of Western Union’s digital ecosystem and expand product offerings, contributing to long-term revenue growth and improved market positioning.
  
• Continued focus on expense management and optimization, including the $150 million cost redeployment program, is poised to enhance operating margins and generate savings that can be reinvested into growth initiatives.

Western Union Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Union's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.1% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $601.2 million (and earnings per share of $1.88) by about November 2027, down from $675.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $664.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2027 earnings, up from 5.3x today. This future PE is lower than the current PE for the US Diversified Financial industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 1.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

Western Union Future Earnings Per Share Growth

Risks

• The macroeconomic and political disruptions in Latin America have led to softer transaction growth, which could impact revenue given that the region accounts for roughly 10% of consumer money transfer revenue.
  
• Emerging softness in the Americas due to changes in migration patterns and election outcomes could further strain revenue from this key region, affecting overall earnings.
  
• The volatility and uncertain contributions from Iraq, with revenue fluctuating between $10 million to $30 million per quarter, make it difficult to rely on stable income from this market, impacting revenue consistency.
  
• Competition in digital financial services remains strong, and while Western Union is investing in technology and expanding card acceptance, costs associated with these expansions could pressure net margins if not offset by sufficient revenue growth.
  
• Execution risks in planned acquisitions and integrations, like the digital wallet businesses in Singapore and Mexico, could lead to unforeseen costs or operational disruptions, impacting net margins and future earnings potential.

Valuation

• The analysts have a consensus price target of $12.97 for Western Union based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.4 billion, earnings will come to $601.2 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $10.62, the analyst's price target of $12.97 is 18.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.