Why Western Union (WU) Bombed Friday

NEW YORK (TheStreet) -- Western Union (WU) bombed on the back of reports from The Wall Street Journal that the CIA is building a database of international money transfers, one of Western Union's core sources of income. Collected under the Patriot Act provision, the database will contain millions of Americans' financial and personal data, sources said.

The CIA activity will likely increase Western Union's compliance costs, which are already at levels investors are uncomfortable with.

After reporting third-quarter figures on Oct. 29, the Englewood, Colorado-based business said it expects to spend 4% of total 2014 revenue on compliance costs, including adhering to rules under the Patriot Act and other terrorism and money-laundering legislation. The following day, shares spiraled 12.4%.

By market close on Friday, shares had plunged 4.3% to $16.70.

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 solid stock price performance, 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."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, WU's share price has jumped by 38.56%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, WU should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • Despite the weak revenue results, WU has outperformed against the industry average of 22.5%. Since the same quarter one year prior, revenues slightly dropped by 0.9%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • 47.11% is the gross profit margin for WESTERN UNION CO which we consider to be strong. Regardless of WU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 15.21% trails the industry average.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the IT Services industry and the overall market, WESTERN UNION CO's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has decreased to $333.40 million or 19.44% when compared to the same quarter last year. In conjunction, when comparing current results to the industry average, WESTERN UNION CO has marginally lower results.

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