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How to Play the Immigration Trend
By Michael Brush
Exclusively for InvestorIdeas.com
December 21, 2006
When U.S. immigration agents raided Swift & Co. meat plants last week as part of a six-state crackdown on illegal immigrants known as "Operation Wagon Train," it touched deep emotions all around.
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On the one hand, it was hard not to find it a little heartless to split up families so soon before Christmas. In contrast, vocal opponents of illegal immigration (“what part of illegal don’t you understand?”) felt comeuppance.
And since all world events find their way into the stock market somehow, you shouldn’t be too surprised that the raids stirred emotions among investors, as well.
The headline-grabbing crackdown darkened the clouds over Western Union (WU), the leading money transfer company in the world. As of December 20, the stock has fallen nearly 4% since the December 12 raids, compared to a slight rise in the S&P 500.
This might be why: Although Western Union has a formidable global reach with 285,000 branches in over 200 countries, about 25%-30% of its business comes from transfers that go across the U.S.-Mexican border.
Last week’s events also seemed to confirm the negative view that most analysts have on Western Union. They’re openly worried about the immigration crackdown. Foreigners, after all, are on to the fact that a Western Union window is a great place to hang out if you’re a cop looking to meet illegal visitors. Immigrants concerned that they may lose their jobs are stashing away money they might have sent home.
Analysts also suspect Western Union is losing market share in the U.S.-Mexico niche since smaller competitors with lower prices didn’t see the same kind of drop off in business as Western Union last quarter.
All of this paints a pretty grim picture for Western Union, a company that recently spun out from First Data (FDC), a payments processing company.
But I’ll take the other side of this trade and bet on Western Union for the following reasons.
Insiders
In late October, a director purchased nearly a quarter million dollars worth of the stock at $22.17, according to
InsiderScore.com. The stock recently pulled back to around that level, or $22.40.
Cheap labor addiction
To me, the key takeaway in the Swift & Co. immigration crackdown has more to do with what didn’t happen, as opposed to what transpired. That is, no charges were filed against the company. This gets at the heart of the trickiest angle to illegal immigration. As much as people say they don’t like illegal immigrants, businesses and consumers are addicted to the cheap labor. Until someone comes up with a fix for that, immigrants are here to stay – even if it is in some “barely legal” format cooked up by legislators forced to come up with a compromise. The U.S. needs the workers too much.
Global income disparity
Likewise, huge global income disparities all but force people from around the world to try to start a life in richer regions like North America and Europe. "If you have the means to travel, get out of your comfort zone and it'll make you a lot more appreciative of what you've got,” says Rye Barcott, a U.S. Marines Captain who has served in Iraq and founded a charity called Carolina for Kibera (http://cfk.unc.edu/bios/rye-barcott.html) to combat African poverty.
If you can’t see it first hand, here are some numbers that show what Barcott is talking about. In Ghana, per capita income is 1% of what it is in the U.S. People in Ghana make $450 per year compared to $43,740 a year in the U.S., according to the World Bank. In Afghanistan it’s even worse. People there earn $270 a year.
Even closer to home, where many immigrants come from, things are not too much better. People in Latin America and the Caribbean make $4,156 a year or about 10% of what people in the U.S. make. Burunidi in Africa has the lowest per capita income at $100 while Norway has the highest, or $59,590.
“Over the long term, we believe that economically developed countries will continue to pull people from poorer countries, and that these migrants will continue to remit money back to their countries of origin,” says Morningstar analyst Mark Weber, who has a five-start rating on Western Union.
Hard workers
Keep in mind that most immigrants to richer countries don’t wind up living like hobos. They work hard and send lots of money home. The tens of millions of migrants around the globe sent $167 billion home last year, according to the World Bank. That’s a big market offering Western Union lots of room to grow.
Spin off magic
Another thing I like about Western Union is that it’s a spin off. These typically outperform – maybe because managers get entrepreneurial out on their own. Or perhaps investors who initially get the shares have to sell because it upsets their asset allocation.
Whatever the reason, Spin-Off Advisors in Chicago recently found that nearly two-thirds of the companies spun off over the last three years have beaten the S & P 500 index this year. A 1999 McKinsey study found similar results, as did a study by Lehman Brothers which looked at spin offs this decade.
The company
As the dominant player, Western Union stands to benefit the most from the long-term immigration trends that will play out around the globe for years to come. Should governments crack down – and put greater regulation on money transfers – Western Union is best positioned to absorb the costs and stay competitive because of its sheer size, says Morningstar’s Weber.
And despite problems with U.S.-Mexico transfers, revenue climbed 13% through the first three quarters of this year, driven in part by a 27% increase in person-to-person transactions. “Western Union's revenue has grown by almost 15% a year since 2001, and it should continue to expand at a healthy rate for the foreseeable future,” says Weber. The company is also a cash cow, producing $1 billion in annual cash flow on around $4 billion in revenue.
As for those problems with transfers to Mexico from the U.S., Western Union is lowering fees and stepping up promotions and loyalty programs with repeat customers, says Jefferies & Company analyst Craig Peckham.
The bottom line: I don’t expect the concerns about immigration reform dogging this company will blow over in a month or two, and neither should you. As always, you should buy this stock with at least a one-year time horizon in mind.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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