Western Union (WU)

First Data (FDC) just recently spun-off Western Union which I think is an excellent development for the company and its shareholders. With operating earnings and return on invested capital around 30% and 60% respectively, it's hard to imagine things getting better, but I think they can.

As part of FDC, WU was held back from cross-selling and up-selling valued added financial services to its customers because of some of the inherent conflicts it posed with FDC's traditional bank and merchant customer base. Now it's free to pursue opportunities like payday loans, small business micro loans and a global card network.

Also, the spin-off makes WU easier to understand and analyze. Simpler, more straightforward businesses trade at premium valuations compared with complex, more diversified businesses.

At $22.50, the stock is trading at 20.8 times 2007 EPS estimates which is below comparables like GPN, MGI, GCA and PAYX. When talk of the spin first surfaced, some analysts thought the shares could trade at a P/E of 24x given the high quality of the shares and strong FCF generation. However, WU saw some weaknesses in their business last quarter due to immigration reform talk and a slowdown in residential construction. This created general uncertainty and lower paychecks for Hispanics in the U.S. which led to lower transaction volume. So, you can make a case the stock has incurred a multiple correction although it has appreciated from its spin price of around $18. I'm still somewhat concerned about Hispanic layoffs in the housing construction market (U.S. money transfers to Mexico = highest margin service), but that doesn't seem to bother Warren Buffett. He is a huge fan of this company and has been buying the stock. I guess I can’t blame him. WU is a steadily growing, very profitable company with solid competitive advantages and high barriers to entry that will make it difficult and extremely costly for competitors to match what they have created on a global basis.

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