MoneyGram Faces Stiff Competition, Growth Could Suffer - Analyst Blog

On Jun 12, we issued an updated research report on MoneyGram International Inc. MGI. While core fundamentals remain fairly strong, higher leverage and intense competition are likely to affect the results adversely in 2014.

MoneyGram remains apprehensive of a loss from U.S.-bound business, given the launch of Walmart-to-Walmart white-label product, which has the potential to directly cannibalize the U.S. market and amplify competitive pricing pressure for the company. This business accounted for 12% of the company's total revenue in first-quarter 2014. Notably, the stock price tumbled by as much as 29% following the introduction of Walmart's product in mid-Apr 2014.

Projecting a reduction in revenues, MoneyGram has initiated aggressive cost-control measures across its global services and trimmed its revenue guidance for 2014 to 1–3% from 8–10% and earnings before interest, taxes, depreciation and amortization (EBITDA) estimate to 0–2% from 7–9%. This puts the bottom line under pressure. The projections for top line and EBITDA growth for 2014 are also lower than about 10% and 6%, respectively, recorded in 2013.

Meanwhile, MoneyGram's financial leverage has deteriorated over the past several years, despite capital restructuring undertaken from time to time. The company also faces currency fluctuations, interest rate volatility and compliance risks associated with its business and cost structure in various jurisdictions worldwide.

Steady Core Fundamentals

Nonetheless, MoneyGram remains sufficiently liquid. At Mar 2014-end, about 85% of the portfolio was in cash and cash equivalents as well as other liquid assets, while assets in excess of payment service obligations were $329.6 million.Even free cash flow increased 42% year over year in first-quarter 2014, backed by strong growth in previous years. Moreover, the latest global transformation program is expected to generate annual pre-tax cost savings at a run-rate of $15–20 million by 2015-end.

Such improved synergies were primarily fueled by strong distribution channels and launch of new products and services.Moreover, MoneyGram is gaining traction through acquisitions, alliances and technology upgrades in self-service revenue stream, which surged 30% in 2013 and 35% in first-quarter 2014. The robust growth further raises optimism on management's outlook of achieving 15–20% contribution from self-service revenues by 2017, up from 7% at Mar 2014-end.

Alongside, money transfer services business continues to be the driving force for MoneyGram.Increasing demand in transaction volumes both in domestic and international markets has paved the way for growth over the past several quarters. The business is expected to witness double-digit growth in 2014 as well.

This Zacks Rank #3 (Hold) stock delivered positive earnings surprises in 2 of the last 4 quarters with an average beat of 8%. The company's fourth-quarter earnings outpaced the Zacks Consensus Estimate by 17.9% and the year-ago quarter figure by over 50%.

Overall, a balanced risk-reward balance in the near term led to no estimate revisions for 2014 and 2015. As a result, the Zacks Consensus Estimate for 2014 and 2015 remained intact at $1.24 and $1.34 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 Ladder Capital Corp. LADR, Euronet Worldwide Inc. EEFTand VeriFone Systems Inc. PAY. All these stocks sport a Zacks Rank #1 (Strong Buy).