Bear of the Day: Western Union (WU)

Some businesses get disrupted quickly. Others decline slowly as competitive pressures build and the underlying economics gradually deteriorate. Western Union (WU) has increasingly fallen into the latter category.

The legacy money-transfer business has been under pressure for years as digital-first competitors such as Wise and Remitly offer faster and cheaper alternatives, while banks and fintech platforms increasingly absorb transactions that once flowed through Western Union's physical agent network.

Those structural pressures have become more acute this year. Tighter US immigration policy is weighing on one of Western Union's most important customer bases, while a new federal tax on cash-funded remittances adds another headwind to its highest-margin channel.

The result has been another deterioration in the earnings outlook, sending estimates sharply lower and pushing WU to a Zacks Rank #5 (Strong Sell).

Western Union's Core Business Remains Under Pressure

Western Union still generates much of its business by moving cash across borders through its global retail network. But that model is becoming increasingly difficult to defend.

Digital remittance providers continue to take share, while Western Union's traditional customer base is facing additional pressure from reduced migration into the United States. Management acknowledged on its most recent earnings call that new migration is critical to replenishing retail customers as existing users eventually return home or migrate toward digital alternatives.

That pressure is already showing up in the numbers. US-to-Mexico transactions declined more than 3% during the quarter, while the broader retail business continues to struggle with organic growth.

Western Union's acquisition of Intermex should provide some revenue support, but buying additional volume does not change the structural challenges facing the legacy business.

Western Union Stock Gets Downgraded

The earnings revision trend is decisively negative.

Over the last 60 days, analysts have unanimously lowered their estimates across timeframes, with no upward revisions. Current year earnings estimates have fallen from $1.75 per share to $1.29, a decline of roughly 26%, while next year's estimate has dropped about 18%.

Near-term expectations have fallen even faster. The current quarter estimate has been cut roughly 34%, while the next quarter forecast has also moved sharply lower.

That revision trend has earned Western Union a Zacks Rank #5 (Strong Sell) and suggests the earnings outlook may still be deteriorating.

At around 5.6x forward earnings, WU certainly looks cheap. The stock also carries a dividend yield above 13%.

But both figures require some caution. A low earnings multiple becomes less attractive when the earnings denominator continues to fall, while such an unusually high dividend yield signals that investors are increasingly questioning the sustainability of the payout.

Should Investors Avoid WU Stock?

Western Union may look tempting to value investors after its steep decline, but the fundamental setup remains difficult.

The company's core business continues to face digital disruption, immigration policy has created an additional headwind, and earnings estimates are being revised sharply lower across the board. Meanwhile, the Intermex acquisition has yet to prove that it can offset the deterioration in the legacy business.

There will eventually be a price where Western Union becomes interesting again, particularly if estimates stabilize and the company's digital businesses begin offsetting the decline in retail transfers.

For now, however, the combination of weakening fundamentals, falling earnings expectations and a Zacks Rank #5 (Strong Sell) suggests investors should remain on the sidelines.

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This article originally published on Zacks Investment Research (zacks.com).

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