MoneyGram Appears Stressed with High Debt - Analyst Blog

On Apr 17, we issued an updated research report on MoneyGram International Inc. MGI. The near-term outlook appears grim given the debt accretionamid higher restructuring costs, which may restrict margin growth. Nonetheless, higher cash flow, fair liquidity position and an optimistic guidance for 2014 remain impressive.

Moreover, this Zacks Rank #3 (Hold) stock delivered positive earnings surprises in only 1 of the last 4 quarters with an average beat of 3.1%. The company's fourth-quarter earnings also outpaced the Zacks Consensus Estimate by 9.4% and the year-ago quarter number by about 35%.

MoneyGram is showcasing superior growth in its money transfer businessdue to increasing demand, generating huge transaction volumes by penetrating into high-growth potential markets globally. By 2013-end, the company had expanded its worldwide agent network two-fold since 2007.

MoneyGram has also been utilizing the Internet, mobile phones, kiosks, cash-to-account services and ATMs for money transfer. The robust growth further raises optimism on management's outlook of generating 15–20% contribution to total revenue from self-service avenues by 2017.

Overall, even in the longer term, money transfer will remain the driving force at MoneyGram. This strategy justifies management's top line and EBITDA guidance at the higher-end of 8–10% and 5–7%, respectively, for 2014. Going ahead, we believe MoneyGram's steady money transfer business growth has the potential to achieve annual revenues of $2 billion by 2017.

Risks Ahead

While MoneyGram witnessed substantial improvement in cash flows in 2013, the company's financial leverage deteriorated over the past several years. Total long-term debt rose consistently to $842.9 million at 2013-end from $639.9 million at 2010-end. Although the latest share buyback has been slightly accretive to earnings per share, it has been funded through a newly issued term loan, thereby adding to the financial risks.

Amid the latest secondary offering, share buyback and new term loan, MoneyGram is seeking to expand the share repurchase from investors up to $300 million, which will also be funded through debt accretion.The company also expects to inflate its revolving credit facility to $150 million from the existing $125 million, overall threatening the company's capital and cash position.

This is at a time when MoneyGram's financial paper products segment and EBITDA margins are facing challenges. Hence, we believe MoneyGram requires disciplined expense management, prudence in consolidating capital and operations given volatile currencies, competition and sensitive investment portfolio.

Overall, an adverse risk-reward balance in the near term has led to negative estimate revisions for 2014 and 2015. As a result, the Zacks Consensus Estimate for 2014 and 2015 dipped by 1 cent and 2 cents to $1.25 and $1.52 per share, respectively, in the last 30 days.

Key Picks in the Sector

While we remain at the periphery with regard to MoneyGram at present, better-ranked stocks in the financial sector include General Finance Corporation GFN, Euronet Worldwide Inc. EEFT and FleetCor Technologies Inc. FLT. All these stocks sport a Zacks Rank #1 (Strong Buy).