Western Union shows resiliency year after year
It’s no secret to great investors that as-reported financial metrics are unreliable.
To be successful, these investors make adjustments to the financial statements to produce a true picture of economic reality, one that is otherwise obscured by arcane accounting principles. This allows them to find companies that exhibit three characteristics: high quality, strong growth potential, and low valuations.
Today, we highlight our FA Alpha screen, which emulates this investment strategy to produce outsized returns in excess of the market over long periods of time.
We’ll take a look at one company in particular on this month’s FA Alpha, describing how as-reported metrics distort economic reality and can lead investors to miss significant opportunities.
Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.
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Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
A company must have a truly impressive economic moat to be able to generate returns well in excess of its cost of capital for 170 years.
That’s what one company, Western Union (WU), appears to have done.
Founded in 1851, Western Union started in Rochester, New York as a telegraph company to transport messages to the pioneers venturing out west.
Over time, Western Union continued to grow, evolve, and become a key player in innovating new technologies. For example, Western Union is the mastermind behind the telex machine, the widely popular precursor to the fax machine.
Western Union has been able to use that same infrastructure to handle what it is best known for today—money wires and remittances. Thanks to its impressive network locations and infrastructure, it has established itself to be a profitable company that doesn’t seem to be going anywhere anytime soon.
However, the market doesn’t seem to quite recognize how strong the company is. The market is currently forecasting Western Union, which has shown impressive resiliency for a century and a half, to see return on assets (“ROA”) collapse.
As-reported markets lead us to believe that Western Union is just barely getting by with an ROA of 7% in 2020.
However, Uniform Accounting tells a different story.
By using Uniform ROA, we see that Western Union consistently generates impressive returns, sitting above 25% for the past three years and even reaching 32% in 2019.
As technology has evolved, so has Western Union, and that is reflected in its robust profitability.
Over the years, Western Union has also positioned itself well to fuel growth, and in almost half of the past fifteen years, it has grown by more than 5%. Last year alone, Western Union grew by over 17%.
Yet even with such impressive metrics, the market still can’t comprehend how good of a company Western Union is, which is why it has a low Uniform P/E that sits at 8x.
That is what makes it such a compelling FA Alpha name. Its high returns, ability to grow, and low market expectations position it for significant upside.
This high-quality market leader in its industry is inexpensively priced and growing aggressively, which is why our FA Alpha Screen discovered the name.
To see the other 49 names on the list, click here.
SUMMARY and The Western Union Company Tearsheet
As the Uniform Accounting tearsheet for The Western Union Company (WU:USA) highlights, the Uniform P/E trades at 8.1x, which is below the global corporate average of 24.0x and its own historical P/E of 11.1x.
Low P/Es require low EPS growth to sustain them. In the case of Western Union, the company has recently shown a 8% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Western Union’s Wall Street analyst-driven forecast is a 3% and 10% EPS growth in 2021 and 2022, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Western Union’s $18 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to shrink by 14% annually over the next three years. What Wall Street analysts expect for Western Union’s earnings growth is above what the current stock market valuation requires through 2022.
Furthermore, the company’s earning power in 2020 is 4x the long-run corporate average. Moreover, cash flows and cash on hand are almost 2x its total obligations, and intrinsic credit risk is 100bps above risk-free rate, signaling low credit and dividend risk.
Lastly, Western Union’s Uniform earnings growth is below its peer averages and the company is also trading below its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research