The Western Union Company (WU), Moneygram International Inc (MGI): This Global Leader in the Money Transfer Business is Really a Buy

After the significant drop on the market in November 2012, The Western Union Company (NYSE:WU) has experienced a nice run-up, climbing from around $12 per share to more than $17.30 per share at the time of writing. Despite the 44% gain, The Western Union Company (NYSE:WU) remains cheap at only 10.9 times its forward earnings. I personally think that there is still decent potential upside for the company in the near future.

A clear leader in global money transfer industry

The Western Union Company (NYSE:WU), the leader in the money transfer industry, has more than 160 years in operations, with 515,000 Agent locations in over 200 countries. The majority of its revenue, 81% of the total 2012 revenue, was generated from the Consumer-to-Consumer (C2C) transactions, while Consumer-to-Business accounted for only 11% of the total sales. A lot of the C2C transactions were conducted via retail (96%), whereas only 4% of the total C2C transactions came from the website wu.com and Account Based Money Transfer services.

According to Aite, the cross-border remittances market will grow in the range of 6%-7% in the next three years, to reach around $563 billion of principal in 2015. The Western Union Company (NYSE:WU) is well positioned for that decent growth because it possesses a market-leading position with a 15% market share. Moneygram International Inc (NASDAQ:MGI) ranked second with a much lower market share of only 5%, owning around 310,000 Agent locations in 197 countries.

Much more profitable and a decent dividend yield

Indeed, The Western Union Company (NYSE:WU) has a much broader network, higher market share and better economies of scale than Moneygram International Inc (NASDAQ:MGI). How about the operating performance?

We can clearly see that Western seems like a much better business, as it delivered much higher profitability. In the past twelve months, while Moneygram International Inc (NASDAQ:MGI) generated losses, The Western Union Company (NYSE:WU) produced around a 17.9% return on invested capital. The operating margin of Western Union was also higher at 23.1%, while the operating margin of Moneygram International Inc (NASDAQ:MGI) stayed at only 4.5%.

Although Moneygram International Inc (NASDAQ:MGI) had a net cash position, its equity was negative at $(172) million, due to nearly $(1.28) billion in cumulative retained earnings. Of the two, only Western Union offers shareholders a dividend yield at 2.9%. In terms of valuation, Moneygram International Inc (NASDAQ:MGI) is a bit more expensively valued, at 7.6 times its EBITDA multiple. Western Union is a bit cheaper with an EBITDA multiple of 7.4.