MoneyGram Slips to Neutral - Analyst Blog
09 January 2012 - 11:15PM
Zacks
We have downgraded our recommendation on MoneyGram
International Inc. (MGI) to Neutral based on the current
sustainability factor. The company reported third-quarter 2011
earnings of 3 cents per share, in line with the Zacks Consensus
Estimate but significantly higher than the loss of 30 cents per
share in the year-ago quarter.
Higher money transfer transaction volumes and higher fee and
other revenue drove the top line, while absence of preferred
dividend payouts, lower tax and interest expenses helped the bottom
line. However, these were partially offset by lower investment
income and higher operating expenses.
With a significant portion in international income, MoneyGram is
severely exposed to interest rate and currency fluctuations. This
further reduces earnings visibility and increases the risk of
liquidity sustainability, which is a prime need of this money
transfer business.
Amid this economic volatility, the effect of the latest reverse
stock split and secondary stock offering had almost a zilch on the
company’s capital and cash position, although it enhanced the
market price, thereby helping investors gain some confidence in the
near term.
Meanwhile, accounting for most of financial paper products
segment, the money order and official check outsourcing services
have been adversely affecting the revenue over the past few years,
also posing sufficient credit risk. The company’s growth is limited
by the poor business diversification, relatively high agent
concentration in its global funds transfer segment and exposure to
regulatory risk.
Moreover, the company continues to expand in new emerging
verticals, which generates lower revenue per transaction compared
to the traditional consumer credit verticals, and also continues to
experience secular and economic declines. Besides, net investment
revenues have been harshly hit by the global economic downturn. An
annualized decline of 15.1% was witnessed in the first nine months
of 2011, when investment revenue shrunk to $13.8 million. Net
investment revenue also plummeted to mere $20.6 million in 2010
from $31.9 million in 2009, $59.8 million in 2008 and $144.6
million in 2007.
On the flip side, the successful completion of the
recapitalization program has helped end the dilution of the stock
and the continuous dividend payment against the preferred shares,
thereby simplifying MoneyGram’s complex capital structure. This has
also helped the company to refinance its existing credit facilities
with a new $540 million facility, comprising a revolver and term
loan with 5.0 and 6.5 years of maturity, respectively, thereby
extending the senior debt maturities to 2017 from 2013.
Overall, the positive effects of the refinancing and
recapitalization have not only aided the company in generating
earnings after posting losses for about nine previous quarters but
also bode well for healthy ratings position. The rating agencies
have affirmed a stable outlook, thereby validating a promising
growth outlook in future.
Despite the unfavourable economic condition of the U.S. housing
market and the growing concern for immigration, MoneyGram showed a
modest growth in the money transfer business. Increasing demand in
transaction volumes both in domestic and international markets has
paved the way for growth over the past several quarters.
Going ahead, the global market for remittance services is
expected to be stable given the protracted and favourable secular
trends of labour force migration. Hence, even in the longer term,
money transfer will remain the driving force at MoneyGram due to
increasing demand. This also appears to be favorable for
maintaining a strong competitive position, against arch-rival
Western Union Co. (WU), in the money transfer
sphere.
Given the pros and cons, MoneyGram’s fourth quarter earnings are
currently pegged at 18 cents per share, significantly up by about
107% year over year, reflecting continued improvement.
However, for 2011, loss of $1.37 per share is estimated, given the
losses incurred in the first half of the year.
Additionally, the company carries a Zacks Rank #3, implying a
short-term Hold rating and long-term Neutral stance on the
stock.
MONEYGRAM INTL (MGI): Free Stock Analysis Report
WESTERN UNION (WU): Free Stock Analysis Report
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