The News Issue Week Day

RICH AMERICA, POOR AMERICA The split nature of today's economy has been great for stock like Coach, tough for ones like Wal-Mart. Why that won't change much, even as the Democrats gain clout in Washington. he New IBM

Big Blue's shareholders have been blue for the past few years. But the tech giant has a new strategy, focused on software. Best of all, it's working.

Randall Forsyth The buck may be real loser in Iraq ...

Review&Preview A vote keeps ASMI intact. Going more nuclear ...

Storming Ahead, After run-up, a few insurers look good ...and Direct TV

Smooth Style Polo stock will stay in fashion ...

Follow the Leaders Copying smart stockpickers is one way to build a best-ideas portfolio, and it saves on management fees. A look at Oracle, Sears, AutoZone,Wendy's and other top holding of five closely watched hedge funds ...

Coming Spinoff Duke Energy's powerful idea ...

The New Big Blue Cover Story: IBM investors may soon be smiling like CEO Palmisano, as Wall Street comes to realize that Big Blue's reinvention as a software giant gives it a steadier, more profitable business with plenty of potential for further improvement ...

Spreading Joy The four rules of good giving ...

Technology Trader Microsoft stock could be ready for takeoff, now that new version of Vista and office have launched ...

13 Great Gadgets Our pick for sleek and sophisticated gadget gifts include Sony TAV-L1 all-in-one home theater, a digital SLR camera, Logitech's Harmony 1000 universal remote ...

Tuesday

Western Union Calling


The money-transfer giant, newly spun off from Fist Data, could deliver some nice reward for investors. But expect some short-term bumps: The company's brisk business with migrant workers has pilled it into the debate over immigration policy.

WESTERN UNION'S BUSINESS IS ALL about fast money-cash zapped around the globe in a flash. An investment in the stock, how ever; may require some patience.

The company, spun off from First Data on Sept. 29, does a brisk business handling money transfers for the world's migrant population. While that service presents tremendous opportunity for the long term, it puts Western Union uncom­ fortably close to America's debate over immigration policy. The rhetoric and the uncertainty could put a damper on the the company's profit outlook, at least through the November elections.

Chances are, though, that investors who hang tough will be rewarded. Mter all, the company has an umivaled global franchise, a strong market, a highly prof­ itable business model and a freshly moti­ vated management team.

Western Union (ticker: WU) traces its history to the dawn of the Telegraph Age in the mid-19th century. It was an original Dow Jones Average member in 1884, and introduced the first consumer charge card (1914) and the first singing telegram (1933).

It was spun off from First Data (FDC) after more than a decade as a subsidiary of the data-processing giant. With the stock trading recently around $19.75, the company has a market value of $15.1 billion and is already a member of the Standard & Poor's 500 Index.

Today Englewood, Colo;-based Western Union is focused almost exclusively on money transfers. It has over 270,000 agents in 200 countries, making it more than three times as large as its nearest competitor, MoneyGram International (MGI).

Essentially, Western Union is a play on increasing cross-border emigration and immigrants' propensity to wire money home. The global migrant population last year numbered 191 million, according to the United Nations, and is projected to gTOW to 280 million by 2050.

The overall market for cross-border remittances, mean­ while, grew an average ofS'l a year from 2003 through 2005, a period in "which VI'estern Union increased its mar­ ket share from 10% to 1.Se::. This has enabled the company to grow faster than the industry, ylith revenue, operating profits and operating cash flmy each climbing an average of 12% annually from 200:3 t:ll'ough 2005.

Western Union has emiab;:,~ high profit margins, above 25%, thanks to its ability to charge relatively high prices for money transfers. Those margins should help produce about $1 billion in annual operating cash flow that can be used to reduce its $3.5 billion in debt and repurchase stock.

Still, there's no denying the political risks. As First Data was on its road show to discuss the spinoff, it 100vered revenue and profit guidance for the remainder of the year and for 2007, blaming a sluwdown in U.S.-to­ Mexico transfer volumes amid talk of a crackdown on illegal immigration. Immigrants, eyen legal ones, evi­ dently shied away from sending money home for fear of government scrutiny.

At the moment, Mexican business accounts for about 10% of revenue. A Jp Morgan analyst figcu'es that-as a worst-case scenario-19-to25cents in earnings per share could be at risk related to "consumer fears surrounding immigration reform". Those are significant sums: The consensus earnings-per-share forecats for 2006 and 2007, reflecting the new company guidance, are now at $1.06 and $1.10, respectively. (The numbers aren't directly comparable, because the '07 forecast includes the added costs of operating as an independent public company.)

As immigration concerns heated up, the Arizona attor­ ney general last month subpoenaed the company's records on transfers from Arizona and 28 other states to the Mexican s ta te of Sonora, reportedly seeking informa­ tion about the smuggling of immigrants and drugs. Last week, Westen, e nion won an order staying the request un­ til a hearing Oct. 16.

At a miniJmm1, Western Union, will need to spend money to "in back loyalty in immigrant communities and assure customers that they are not at risk. And the stock could ,yell proye volatile in the weeks ahead.

The fixation on immigration-policy risks has overshad­ owed Western Union's stellar long-term growth pros­ pects, globally diversified business and fairly attractive equity valuation. Key markets like Asia, India, Mrica and Russia, while much smaller than Mexico, are grow­ ing briskly. Following the 2007 adjustments to a public­ company cost structure, earnings should resume their 10% or better growth path.

At the Clll'rent share price, Western Union trades for just under 18 tin1es expected 2007 earnings. That might not seem cheap, but steady, low-capital-intensity businesses like transaction processors tend to fetch premium multi­ ples. MoneyGram also garners a 2007 multiple near 18.

But Jp Morgan's Tien-tsin Huang notes that 25% of MoneyGram's profits come from its payment-systems unit, essentially a bank-like business which earns an inter­ est-rate spreacl on a check and money-order portfolio. Place a bank-like multiple on those earnings, Murphy says, and MoneyGram's core money-transfer earnings are given a 21-22 multiple on 2007 earnings. At 21 times its 2007 forecasts, "'.'estern Union would be worth 23, or 14% higher than the stock's current level. And that wouldn't account for its superior network and market share.

What's more. established businesses that are spun off have a strong tendency to have their shares outperform once liberated. "Vestern Union management has been freshly loaded "ith stock options, most of them profit­ able only above the current stock price. You don't need to receive a singing telegram to recognize that company executives have strong incentives to enrich themselves and shareholders by confounding the doubters.

Complete Archive Desember 2006

The New Cisco As technologies like Internet video take off, Cisco Systems, the king of computer networking, will be among the biggest winners. Why its shares could rally another 15%.

Survivor! GOP Will Hang On Despite a profusion of predictions to the contrary, the Republicans will keep control of Congress through just barely. So says our highly reliable seat by seat analysis of local political funding.

The New IBM Big Blue's shareholders have been blue for the past few years. But the tech giant has a new strategy, focused on software. Best of all, it's working.