Evolve 2025 Strategy Fuels Optimism With Digital Growth And Market Share Gains

Key Takeaways

• Western Union's Evolve 2025 strategy and adoption of machine learning aim to drive transaction growth and enhance digital operations efficiency, impacting revenue growth.
  
• Efforts to align transaction growth with revenue growth and focus on digital and retail expansion are expected to improve net margins and customer retention.
  
• Reliance on optimistic remittance volume predictions, competition in digital transfers, and regulatory changes may impact revenue, margins, and earnings unpredictability.

Catalysts

Provides money movement and payment services worldwide.

• Western Union's implementation of its Evolve 2025 strategy, aimed at improving customer and agent experiences, is expected to sustain mid-single-digit transaction growth, directly influencing future revenue growth.
  
• Efforts to narrow the gap between transaction growth and revenue growth, specifically aiming for a 200-300 basis points long-term goal, are anticipated to improve net margins by enhancing efficiency and profitability.
  
• Gaining market share again in 2023, after previously losing to competitors, indicates a strong potential for Western Union to expand its revenue base, especially given the low teens market share and the World Bank's positive outlook on remittance volume growth.
  
• Adoption of machine learning algorithms to optimize marketing and improve digital platform efficiency is poised to drive significant transaction growth, enhancing revenue from digital operations, which is critical for overall revenue growth.
  
• Western Union's focus on robust expansion and efficiency improvements in its digital and retail businesses, including the roll-out of products like Quick Resend and account payout options, is likely to contribute to a sustained increase in customer transactions and retention, impacting both top-line growth and margins.

Assumptions

• Analysts are assuming Western Union's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.6% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $608.3 million (and earnings per share of $1.91) by about October 2027, up from $581.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2027 earnings, up from 6.8x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 1.95% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.92%, as per the Simply Wall St company report.

Risks

• The reliance on remittance volumes predicted by the World Bank for growth, which if inaccurately optimistic, could impact future revenues.
  
• Potential margin compression from increased competition in digital money transfer services, despite aggregate pricing increases, impacting net margins.
  
• The impact of volatile and uncertain revenue from locations like Iraq, which fluctuates significantly, could adversely affect overall revenue predictability.
  
• Ongoing investments in digital platform improvements and marketing that, if not yielding expected transaction growth or customer retention, could negatively impact earnings.
  
• Legal or regulatory changes affecting remittance flows or operations, especially in key markets, could lead to increased operational costs or limitations on business practices, impacting net margins or revenue.

Valuation

• The analysts have a consensus price target of $13.07 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 $4.3 billion, earnings will come to $608.3 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 7.9%.
• Given the current share price of $11.75, the analyst's price target of $13.07 is 10.1% higher.
• 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.