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What's Behind Western Union's Steep Slump?

Stocks in this article: WU

NEW YORK (TheStreet) -- Western Union (WU) shares fell a steep 12.8% on Wednesday morning after reporting an as-expected profitability decline.

For the third quarter, the money-transfer company reported earnings of 39 cents a share, beating Wall Street expectations of 35 cents a share. Revenue of $1.4 billion was broadly in line with expectations.

This quarter's results, though expected, reflect a significant loss in profitability year over year. Net income plummeted 20% to $214.4 million from $269.5 million in the year-ago quarter, while earnings per share dropped 13%. Sequentially, net income and earnings each gained 8% since the second quarter.

The Englewood, Colo.-based company continues to suffer from increasing compliance expenses in Europe and mobile-focused competitors such as MoneyGram International (MGI) and Xoom Corp  (XOOM). (XOOM)

Increasingly strict regulations, in particular, weighed heavily on forecasts for a sluggish 2014. As it implements anti-fraud and laundering measures, Western Union expects compliance-related expenses to increase to around 3.5% to 4.5% of full-year revenue in 2014 from 2.5% in 2013.

"Due to recent change in both the expected incremental compliance expenses as well as the potential business impact from new compliance procedures, we do not expect growth in operating profit in 2014 at this time," said CEO Hikmet Ersek in a conference call.

TheStreet Ratings team rates Western Union Co as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about its recommendation:

"We rate Western Union Co (WU) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, increase in stock price during the past year, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share."

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