Evolve 2025 And Eurochange Acquisition Will Expand Opportunities Amid Risks

Key Takeaways

• Western Union's Evolve 2025 strategy aims to transform the company by addressing past issues for sustainable and profitable growth.
  
• Expansion in the Middle East and strategic acquisitions in Europe are expected to accelerate revenue growth and improve margins.
  
• Geopolitical headwinds and slowing remittances in the Americas are impacting Western Union's revenue growth, transaction volume, and market share.

Catalysts

Provides money movement and payment services worldwide.

• Western Union's Evolve 2025 strategy is focused on transforming the company into a customer-centric organization by addressing past issues such as overpricing and underinvestment. This initiative aims to drive sustainable, profitable revenue growth, expected to positively impact future revenue and earnings.
  
• The acquisition of Eurochange is anticipated to enhance Western Union's distribution strategy in the UK, strengthening its financial products and services portfolio. This strategic move is expected to accelerate revenue growth and improve net margins in the region.
  
• Expansion efforts in the Middle East, including partnerships with STC and du Pay, coupled with investments in digital channels, aim to capitalize on the growing remittance market in Saudi Arabia and the UAE. This regional focus is poised to boost transaction growth and revenue in these high-potential markets.
  
• Western Union's diversified geographic presence results in robust performance outside the Americas, such as in Europe, the Middle East, and APAC, which account for 50% of the company's money transfer revenue. These high-performing regions are expected to drive future revenue growth despite challenges in the Americas.
  
• Ongoing operational efficiency programs and planned cost savings are set to support earnings growth by reducing expenses ahead of schedule, thereby enhancing operating margins and enabling strategic reinvestment into growth areas or shareholder returns.

Western Union Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Union's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.1% today to 13.0% in 3 years time.
• Analysts expect earnings to reach $557.0 million (and earnings per share of $1.89) by about May 2028, down from $915.0 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 7.9x on those 2028 earnings, up from 3.5x today. This future PE is lower than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 2.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

Western Union Future Earnings Per Share Growth

Risks

• The geopolitical headwinds in the Americas, such as slower migration trends, are impacting revenue growth due to lower remittance volumes, particularly in Latin America. This results in risk to sustained transaction growth and regional earnings.
  
• The company's retail business in North America has been underperforming due to geopolitical issues and increased competition in the U.S. to Mexico corridor, potentially affecting revenue and market share in important regions.
  
• Adjusted revenue excluding Iraq declined by 2% year-over-year, and the reliance on macroeconomic conditions for improvement suggests potential revenue volatility and unpredictability in achieving growth targets.
  
• Changes in principal per transaction (PPT) dynamics, with increases potentially indicating less frequent transactions, could impact overall transaction volume and, consequently, revenue and net margins.
  
• Slowing consumer remittances in specific countries such as Ecuador, Mexico, Colombia, and Bolivia may indicate broader slowing trends in the Latin American market, affecting future revenue and transaction growth prospects.

Valuation

• The analysts have a consensus price target of $11.125 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 $17.0, and the most bearish reporting a price target of just $7.5.
• 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 $557.0 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of $9.66, the analyst price target of $11.12 is 13.2% 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.