Expansion Initiatives Could Lead To Higher Future Costs

Key Takeaways

• Western Union's strategy to expand products and digital services aims for revenue growth, but initial costs could pressure profit margins.
  
• Efforts to reduce costs through restructuring may enhance efficiency, though near-term earnings might be impacted before cost savings materialize.
  
• Western Union's focus on digital expansion, cost optimization, and strategic growth strategies positions it for enhanced revenue diversification and improved profitability.

Catalysts

Provides money movement and payment services worldwide.

• Western Union's Evolve '25 strategy aims to return the company to sustainable, profitable revenue growth by improving their value proposition and expanding product offerings. This could potentially drive higher revenue but might lead to increased operational expenses impacting net margins.
  
• The introduction and expansion of owned location networks and concept agents, as evidenced in regions like Asia and within markets like Australia and New Zealand, indicate potential growth in revenue streams. However, initial operational costs might pressure net margins until these networks achieve scale efficiencies.
  
• Western Union's efforts to enhance their digital platform and expand into additional countries, such as launching new digital services and wallets in Asia and Africa, aim to drive digital revenue growth. While these introductions are expected to increase transactions and revenue, there could be initial costs that may compress net profit margins in the near term.
  
• The shift towards expanding Consumer Services to grow double digits annually through new product offerings can lead to increased revenue. Still, scaling these services may entail substantial marketing and operational investments that could affect operating margins before the company experiences improved earnings.
  
• Western Union's cost-reduction programs, like the $150 million expense redeployment initiative, are enhancing efficiencies by reallocating resources. However, short-term restructuring costs may pressure near-term earnings before the benefits of these cost savings fully reflect in net margins and profit growth.

Western Union Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Union's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.2% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $606.4 million (and earnings per share of $1.97) by about March 2028, down from $934.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $668.9 million in earnings, and the most bearish expecting $529.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, up from 4.2x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

Western Union Future Earnings Per Share Growth

Risks

• Western Union's strategic focus on expansion and innovation, such as the introduction of a digital platform in multiple countries and investments in owned retail locations, demonstrates a commitment to growth and market adaptation, which can positively impact revenue and earnings.
  
• The company's Evolve '25 strategy is showing results with steady growth in adjusted revenue. This indicates that the firm is moving toward sustainable, profitable revenue growth, potentially boosting net margins and earnings.
  
• Western Union's digital business is experiencing sustained transaction growth and improved customer acquisition costs, signaling a potential shift to higher future revenue and profitability.
  
• The strong performance of its Consumer Services segment, with consistent double-digit growth, could enhance revenue diversification and improve operating margins over time.
  
• Western Union's ability to optimize its cost base and realize savings efficiently reflects a robust management strategy that could positively affect the company's operating margins and overall earnings.

Valuation

• The analysts have a consensus price target of $12.133 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 $9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $606.4 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $11.61, the analyst price target of $12.13 is 4.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.