“ I got an intrinsic value of $14.51 for WU, representing a 73% undervaluation at current prices. There is a large margin of safety here, and although there are significant risks and problems, the business is not dead and is trading extremely cheaply. As you can see in my alternate outcomes, if the margin was 12% after year 5 and growth was -1.5% after year 10, it would still be undervalued by 20%. For WU to be fairly valued, its EBIT would have to decline by 5% terminally, a possibility I see as unlikely.
WU has a dividend of $0.94 per share, yielding about 11% with a payout ratio of only 55%. On top of that, they bought $212 million in stock in the LTM. Assuming the company returns all its FCF, investors will get a 20% return in 2026.
The margin of safety is large, and insiders are buying. With the CEO, CFO, and President of Europe, Africa, and MEPA all buying significant shares since August, now seems like a great time to enter. To me, the business is certainly in decline, but it is trading at a bargain price, and while it is declining, it will still produce significant cash.
Risks and Final Thoughts
WU is transforming its operations and needs to get this right for the business to stabilize. While its customers have been loyal, this may not continue as people are becoming more cost-sensitive, so the shift away from WU may be quicker, thus making stabilization harder and more expensive. Additionally, management needs to avoid sending good money after bad during this shift and prioritize shareholder returns (large insider purchases and historical dividends make me optimistic management will remain shareholder-friendly).
Secondly, in their latest 10-Q, WU has $2,600 in gross debt with a $600 million 1.35% note due in 2026, and although it has the cash to pay it, as the business declines and if the Intermex acquisition is approved, its debt cost will likely increase, further pressuring the business. Finally, WU generates significant revenue overseas, and increasing global tensions may further disrupt its operations.
I believe the business will stabilize, with the possibility of a turnaround if management can replicate its European strategy. However, competition and macro risks are significant, and the business could continue to decline. Even with more declines, I believe WU will produce cash on its way down, and the business is selling so cheaply, investors should easily see their capital returned through dividends and buybacks; therefore, I am giving WU a Strong Buy rating."
---written by Penguin Value Investing
