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

Recently, MoneyGram has put itself on sale and it reported that it had talked to several potential buyers. According to Barron’s, analyst James Friedman of Susquehanna Financial Group thought that MoneyGram could be bought out at around $27 per share, implying a EBITDA multiple of around 9.4. If the EBITDA multiple of 9.4 was applied to Western Union, the company should be worth around $22 per share, a 27% premium to its current trading price.

In the increasing trend of using plastic payment and electronic transfers, the physical location money transfer business will face rising competition. A new online transfer company, Xoom Corp (NASDAQ:XOOM), has emerged with operations in around 30 countries. Xoom Corp (NASDAQ:XOOM) is expected to scale up its business much faster than other physical location money transfer companies because it focuses mainly on online money transfer. Moreover, it incurred no cost for more customer additions. Because users care about the safety, convenience and cost when it comes to choosing money transfer companies, a lower-cost player would have significant advantages.

Indeed, Xoom Corp (NASDAQ:XOOM) has managed to grow quite rapidly, up 43% in the first quarter of 2013. However, the business is not profitable yet. Its GAAP net loss came in at $79,000 in this quarter, a significant improvement from a loss of $494,000 last year. For the full year, the company expected to generate $104-$106 million in revenue, while the net loss was estimated to stay in the range of $0.37 – $0.32. Xoom Corp (NASDAQ:XOOM) seems to be quite pricey with a price-to-sales ratio of 9.6.

My Foolish take

Personally, I am quite excited about Western Union at its current price. Because it has a leading position and the broadest agent network in the industry, Western Union is a good stock for investors to hold in the long run. With decent dividend yield, a reasonable leverage level, a reasonable valuation and a high profitability, there will be more potential upside for this money transfer business.

Anh HOANG owns share of Western Union. The Motley Fool recommends Western Union. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article This Global Leader in the Money Transfer Business is Really a Buy originally appeared on Fool.com is written by Anh HOANG.

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