Morgan Stanley Doesn't Accept Western Union Or Paychex, Remains Underweight On Both

Although the Payments segment is benefiting from secular tailwinds, there is downside to The Western Union Company (NYSE: WU) and Paychex, Inc. (NASDAQ: PAYX), Morgan Stanley’s Danyal Hussain said in a report. He added that both companies would likely deliver lower growth than peers, and “are exposed to factors that skew Risk/Reward to the negative at current valuation.”

Analyst Hussain has Underweight ratings on both Western Union and Paychex, with price targets of $17 and $49, respectively.

Money Transfer

The Money Transfer industry is expected to generate modest growth in global migration and wages, while total remittance volume growth is estimated at 3.8 percent per annum between 2015 and 2018, according to the World Bank.

“We expect revenue growth to be even flatter as rising competition erodes pricing among the leaders,” Hussain commented.

Related Link: Western Union Completes Southwest Border Monitor Primary Recommendations

The analyst mentioned that against this backdrop, Western Union has maximum downside due to:

• Limited revenue growth, given the company’s premium price and diminishing network advantage in cash money transfer
• The world is conducting more transactions online, which “levels playing field” and creates more risk than opportunity to growth and margins
• Shares should remain under pressure due to uncertainty about sustainable tax rate
• Rising tax rate in coming years should exert pressure on EPS growth

Payroll

“The Payroll industry is comprised of the mature, slow-growth core payroll industry supplemented by faster-growth ancillary HR Service products, which have benefited from rising HR regulation/complication following implementation of the Affordable Care Act (ACA),” the Morgan Stanley report stated.

While this tailwind has boosted revenue growth towards high-single digits, a downturn to mid-single digits in coming years is likely when the tailwind dissipates. The analyst added that Paychex is particularly exposed to this due to:

• Rising competition in coming years, given the company’s premium pricing and margin profile
• The stock’s premium valuation against ADP

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