It's amazing how one day can change everything. On Thursday it seemed as if the sky were falling and then one day later the situation is completely changed. Without doubt the currents are still swirling but it looks as if they might be coming into alignment.
It took some time but maybe now good news will be good news again, even with an expectation for more rate hikes this year. This week we saw a continuation of health in the labor market, health supported by retail sales, and since our economy is driven by labor and consumer spending it looks like we're doing OK.
Friday's market action was really nice to end the week. The S&P extended its bounce from long term support, the technicals look pretty good, and things are shaping up for the economy. Labore is good, spending is OK and improving, the dollar is moving off its highs, oil prices are low and possibly bottoming, earnings are generally better than expected except where oil is concerned, EU GDP is bouncing back . . . what more could the market want?
NEW BULLISH Plays
Western Union is one of the more recognizable names in the market. Although the mode of transport has changed from stagecoach to digital the basic business model has remained the same for 165 years, the transfer of wealth. Western union is money transfer and payment solutions provider operating in 34 countries with 3 business segments; person to person, person to business and business solutions.
Why We Like It
The company reported earnings earlier this week and results were good. Despite the negative impact of currency conversion the company was able to meet expectations and provide forward guidance in line with expectations. Merely meeting expectations isn't really enough to get the market excited but the inclusion of a -$0.15 impact into the forward guidance and the recent decline in dollar value is reason enough to think guidance could be low.
Speaking of the dollar. I don't mean to completely discount the impact of currency conversion. Merly to point out that the projected impact for 2016 may be too high. Looking at the chart of the DXY it is clear that the dollar is declining in value and trending in the average range we saw in 2014. If it continues to fall back to the bottom of the range negative impact in 2016 should be no worse than 2015.
Results for the 4th quarter and full year 2015 were good. The company reported earnings of $0.42 on revenue of $1.38 billion; earnings were in line with estimates, revenue was short by 0.02 billion. In constant currency this a 3% gain in revenue for the fourth quarter and a 4% gain for the full year. There were a couple of other red flags in the report but all related to currency conversion. One was margin. Margin improved from 20% to 20.9% in 2015 but is expected to fall back to 20% in the coming year.
Any reduction in earnings due to narrowing margin should be more than overcome by increased revenue. Economies in North America and Europe, the two largest segments by region totaling more than 40% revenue, are both strong and growing. Speaking solely of the US labor trends and earnings point to strength and should fuel person to person transactions, 80% of total business.
Another reason to expect revenue expansion is the expanding footprint. The company operates in over 200 countries, 34 added in the past year, including 100,000 kiosks and ATM's and is planning to continue expanding into 2016. At the same time the company is expanding its services and has recently added a 3rd payment solution, the WU Connect, which enables users to offer Western Union services on their platforms.
On a technical basis the stock looks like it is in reversal and heading higher. The stock is moving up off of a double bottom with increasing volume. Volume has been on the rise for the last month, the last week has been more than 2X average daily. Today the stock jumped 4% to break above the short term moving average. MACD momentum is bullish and on the rise, confirming the break. Stochastic is still weak but consistent with a signal early within a bullish movement. Today's action saw prices hover around $0.85 with a Delta of 0.48. The average analyst estimate for the stock is just over $18.79, not high, but the data pool is skewed to the upside with low outliers dragging down the mear. The high target is $24.
Our play is to buy a May $18 call with an $18 price trigger. The option is cheap so I chose the May expiry to give the stock time to move.
NEW BEARISH Plays
No New Bearish Plays