Western Union: Lowering Moat Rating to Narrow From Wide

Western Union is the largest player, by far, in an industry where size confers significant benefits. We see three potential advantages arising from the company’s size. First, we think Western Union has historically been able to maintain premium pricing in some corridors, resulting in an intangible asset advantage. Second, we think the company’s size has allowed it to pay relatively low commission rates to agents, as it could offer relatively high volumes as an offset, creating something of a network effect. And, finally, we think the scalable nature of the business creates a cost advantage for an industry leader like Western Union. We think the first two competitive advantages (premium pricing and lower agent commissions) have eroded to a point where they no longer meaningfully contribute to the company’s economic moat. However, we think Western Union’s scale advantage, which, in our view, has always been the primary moat driver for the firm remains in place. As result, we are lowering our moat rating for Western Union to narrow from wide. We are also lowering our fair value estimate to $17 per share from $18, mainly due to the change in the moat rating.