In today's technology-filled world, it is rare for the business with staying power to avoid complete disruption by a new start up. The stories are endless. Thanks to names like Amazon (AMZN) and Netflix (NFLX), companies that were once household names like Circuit City and Blockbuster Video are relics of business. Expedia (EXPE) has rendered the travel agent all but obsolete. Now, names like Uber and Airbnb are threatening once mighty industries like the taxi cab and lodging industries.
But some seemingly boring stalwarts continue to thrive and still appear to be healthy investment prospects. Western Union (WU) and MoneyGram International (MGI) basically have a duopoly in the money transfer business. By inserting its locations into businesses like Kroger (KR) and Wal-Mart (WMT), Western Union basically became a partner to these businesses and thus eliminated a source of competition. Because the money transfer business is a digital process, WU is a technology company. The company also has innovated with a Smartphone app that lets customers transfer money with a few clicks and for as low as one dollar.
Western Union is not generating the growth numbers hot tech companies are generating. But the company has some sexy numbers, starting with a return on equity of more than 70%. In some years that number is 100%. Unfortunately, WU can't reinvest all its capital at those rates but the company is doing the next best thing: buying back tons of stock and paying a dividend, currently 2.8%.
With a current estimated value of $11 billion, WU is generating more than a billion dollars of free cash flow each year. As long as the company continues to buy back shares and pay a dividend, investors are set to realize healthy returns each year. But don't dismiss growth potential; the company's transfer business is still small in places like China and other parts of the world.
MoneyGram is the smaller player in the field with a market cap of $500 million and an estimated value of $1.5 billion. The business is being valued at 7x earnings versus 11x for Western Union. David Abrams, a former analyst for Seth Klarman who now heads Abrams Capital, recently disclosed a big stake in MoneyGram.
I believe the infrastructure these businesses have created is the hidden value. The money transfer business is a pretty basic one that is dominated by these two names. The returns on capital are juicy but the threat of new entrants seems minimal. As long as the capital allocation remains sound, investors will be rewarded.
