Come for the Value, Stay for the Moat
Western Union's moat is wider than it appears.
In our view, Western Union (WU) is an attractive long-term holding, given the wide economic moat that surrounds its business and its solid long-term secular growth prospects, as opposed to a temporary value play. This is one of our most controversial wide moat ratings. But we believe the source of its moat is not well understood, and its competitive advantage is much more sustainable than most investors realize. We think Western Union's moat is driven by its sizable lead in an industry that is driven by scale, and this dynamic is the primary reason the firm's operating margins are more than twice as high as its closest competitors'.
Investors generally rely on World Bank's global remittance data to estimate the size of the money transfer industry. In 2014, the World Bank estimated that global remittances totaled $583 billion; on that basis, Western Union would have only 13% market share. However, the World Bank data includes high-dollar amount transfers that are not served by money transfer operators like Western Union. While the World Bank does not provide a breakout of these different areas of the market, U.S. banks do disclose international remittance volume in their call reports. Using the top 10 U.S. banks by deposits, we estimate that U.S. banks account for a little over 60% of remittance dollar volume coming from the United States. Western Union also estimates that banks handle about 60% of global remittances. As a result, we believe 60% is a reasonable estimate of the portion of global remittances handled by banks.
Brett Horn does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.