Business Model: To send money efficiently and
cheaply around the world with 510K locations. C2C represents 82% of revenue, geographical diversification of
revenue split across Europe(22%), North America(19%), Middle East and Africa (16% with 6% growth YoY),Asia Pacific(12%), Latin
& Central America(8%) and WesternUnion.com (4%, C2C E-commerce, with 31%
growth YoY in digital expansion).
C2B contributed 10% of revenue and Business Solution represents 7% of revenue.
Investment Thesis: 1) Price is low due to worry
of compliance cost(4.5% of its revenue), but cost will be normalized in the
future(FY14 guidance=3.5% to 4.0% of revenue), other competitors might not be
able to compete due to non-compliance issue(country specific) like adhere to
money laundering(for e.g. Barclays exited money transfer business in Jul 2013),
therefore strong economic moat will most likely enhanced in future due to
regulatory moat as shown by past average 5 years ROC = 643.5% 2) shareholder
friendly; generate around $1.1b of operating cashflow, with 61% used to do
stock repurchase and dividend payback 3) Strong distribution network, with more
than 510K locations worldwide, emerging market would still need brick and
mortar store to receive physical money with flexibility of doing price
adjustment if there is a competition, 4) e-commerce segment is growing, as well
as Business Solution segment(average 10% per quarter), 5) potential growth in
India, China, Mexico and the Philippines with workers needed to send money back
home. Remember spending money using credit
card (value for purchased items are relatively lower) and transferring money(notional
maybe large) are two different things. Need lower transaction cost, network
effect(brick and mortar), compliance and reputation(163 years of history) to be
in money transfer business.
Profitability & Financial
Ratio:
2009
|
2010
|
2011
|
2012
|
2013
|
TTM
|
2009-2013
CAGR
|
|
Revenue(USD
mil)
|
5084
|
5193
|
5491
|
5665
|
5542
|
5587
|
1.74%
|
Gross
Margin(%)
|
43.45
|
42.64
|
43.51
|
43.61
|
41.63
|
41.13
|
-0.85%
|
Operating
Margin(%)
|
25.23
|
25.04
|
25.22
|
23.48
|
19.98
|
19.4
|
-4.56%
|
Net
Margin(%)
|
16.7
|
17.52
|
21.22
|
18.11
|
14.41
|
14.04
|
-2.91%
|
Asset
Turnover
|
0.79
|
0.68
|
0.65
|
0.61
|
0.57
|
0.56
|
-6.32%
|
Equity
Multiplier
|
20.77
|
13.60
|
10.13
|
10.06
|
9.16
|
9.23
|
-15.11%
|
EPS(diluted)
|
1.21
|
1.36
|
1.85
|
1.7
|
1.43
|
1.44
|
3.40%
|
Free
Cashflow per share
|
1.64
|
1.32
|
1.6
|
1.51
|
1.51
|
1.52
|
-1.64%
|
Number of
shares(mil)
|
701
|
668.9
|
634.2
|
607.4
|
559.7
|
539.9
|
-4.40%
|
Dividend
yield(%)
|
0.53
|
1.30
|
1.63
|
2.77
|
2.93
|
3.00
|
40.77%
|
EV/EBIT
|
11.15
|
10.21
|
8.8
|
7.55
|
10.44
|
6.32
|
|
ROC(%,Greenblatt
definition)
|
646.85
|
648.75
|
701.98
|
674.78
|
545.52
|
526.96
|
|
Price to
Free Cash Flow
|
8.93
|
14.07
|
11.41
|
9.01
|
11.35
|
10.31
|
Peer analysis: Xoom is operating on an online
model only, trading at x128.7 P/E; Moneygram traded at 5.78 EV to EBIT but with
lower net margin of 7.29% and only 300K locations. Euronet has less than 150K
locations.
TTM
|
Moneygram
|
Xoom
|
Euronet
|
|
Revenue(USD$mil)
|
5587
|
1516
|
140
|
1485
|
EV/EBIT
|
6.32
|
5.78
|
75.84
|
19.51
|
ROC(%)
|
526.96
|
4.85
|
14.25
|
112.36
|
Net
Margin(%)
|
14.04
|
7.29
|
2.9
|
6.36
|
Asset
Turnover
|
0.56
|
0.31
|
0.49
|
0.91
|
Valuation: Traded at 6.32x EV/EBIT(10
years EV to EBIT range: 5.3 to 19.9); 10.31x P/FCF(10 years P/FCF range =6.69
to 28.69). Using earnings power valuation with no growth assumptionà27% upside from current price
EBIT
Margin average for the past 5 years
|
0.230811
|
||
Average
Sales for past 5 years(mil)
|
5404
|
||
Average
EBIT(mil)
|
1247.304
|
Required
Return of Equity
|
9.00%
|
- Current
interest(mil)
|
174
|
Forecast
equity value(mil)
|
10603.38
|
- Current
tax(mil)
|
119
|
Amount of
outstanding share(mil)
|
539.9
|
Add: 3
years R&D
|
0
|
||
Earning
Power(mil)
|
954.3039
|
Fair value
of share(US$)
|
19.64
|
Risk: Low revenue growth; earnings hurt from strong
USD in short term; competition from Peer to Peer transfer and Mobile Payment;
economy downturn causes worker to lose job and then sending less money back
home. However operating margin maybe able to improve to 25% once the compliance
completed, thus offsetting the low revenue growth, with added bonus from
digital expansion in C2C channel.
Summary: Buying a high ROC (due to regulatory moat and
no high capex needed) company with a cheap price(temporarily low due to
compliance cost) will offer decent return in a long run.(credit to Joel
Greenblatt). Notable guru holdings: David Abrams(used to work with Seth
Klarman, 26.31%), Charles Bobrinskoy(Ariel Focus,4.8%), John Rogers(Ariel
Appreciation, 4.51%)