Market Overview

Immigration Reform: Are There Any Benefits For Money Transfer Companies?

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“When two elephants fight, it is the grass that suffers’’ – Unknown

This maxim is particularly true in the on-going battle between pro-immigrant and anti-immigrant groups in the contentious U.S. immigration reform community, with both parties relentlessly making efforts to see that their side wins. Meanwhile, America’s 11 million undocumented immigrants, and even prospective immigrants continue to wonder what would become of their dreams. Would they be deported, would they be retained, would they be able to send money home to support their families or would they get a chance to even become a citizen of the U.S or obtain a lawful status through some legitimate means like the services offered by the American Immigration Lawyers Association?

It is difficult to envisage when this raging battle about the immigration reform will come to an end with the Republicans stuck to their guns. It’s been 10 months since the senate passed the comprehensive immigration law, yet the Republicans remain staunchly in support of massive deportation of immigrants. While the reform is being stalled in the House, pro-immigrant activists backed by some powerful company executives like the Facebook founder, Mack Zuckerberg, are making frantic efforts to put pressure on President Barack Obama to use executive authority to stop the deportation of people, who could have enjoyed the benefits provided in the proposed bill.

So the struggle continues. However, this article is not really about the misunderstanding surrounding the immigration reform bill but rather to point out the stock-market impact of the immigration reform on some money transfer companies publicly quoted in the U.S. After all, companies like Western Union (WU), Xoom (XOOM), and MoneyGram (MGI) deal with the business of remittances.

How does immigration reform impact the stocks of these companies?

The formal telegraph giant Western Union (NYSE: WU), now a premium brand in the remittance business with over 80 percent of its annual revenue coming from money transfer, earned $ 5.5 billion revenues last year from its global money transfer and payment services. Notably, immigrants form a large chunk of their customer base.

Global remittances, plus those to high-income countries, are projected to grow to $685 billion in 2015 and $707 billion in 2016. In actual fact, remittances to developing countries like Nigeria, Lesotho, and Kenya etc. have been projected to grow by 10.1 percent in 2014, 10.7 percent in 2015, and 9 percent in 2016 according to a recent World Bank report. The U.S. is one of the highest destinations for immigrants in search of greener pastures, which is why many immigrants to the U.S. often require the advice of an expert to make it there, legally. Western Union money transfer services are global and the price of the company’s stock promises to rise higher on the height of the aforementioned projections in global remittances. Really, the future sure looks bright for the company and its shareholders.

MoneyGram (NASDAQ: MGI) is another company that has both international and internet presence though not as extensive as WU in the money transfer business. However, the company recently suffered a major hit in its stock price by a staggering 18 percent owing to the news of the entrance of Wal-Mart (NYSE: WMT) into the money transfer business. The losses notwithstanding, I believe that once the immigration reform bill is passed, the resultant boom in the millions of people that would want to send money outside the U.S would perhaps help to cushion the blow suffered by the company’s stock in recent days.

Xoom (NASDAQ: XOOM) is a San Francisco based digital money transfer company that provides digital consumer remittances across the globe. The company prides itself for providing frictionless money transfer services via its online portal and it is positioned to benefit from the expected increase in global funds transfer once the immigration reform bill is passed into law.

Valuation metrics and growth prospects for MU, XOOM and MGI

Xoom’s 2014 first quarter financials were better than what was expected by analysts. Its revenue increased by 48% to $35 million. The company’s adjusted profit for the quarter tripled to $0.06 a share compared to $0.02 per share it reported during the corresponding period a year ago. Analysts were expecting Xoom to report $34.3 million revenue for the quarter and a loss of $0.04 per share. However, despite this promising quarterly result, Xoom isn’t cheap because its P/E of 135 is rather high but the company is on the path of growth based on the level of its quarterly transactions and the steady growth of its active customers.

Western Union remains a solid business going forward despite the unwarranted recent panic from investors leading to a crash in its stock price due to Wal-Mart’s announcement of incursion into money transfer services. Since the advent of PayPal, Xoom, and Bitcoin left Western Union stronger and not shattered, the incursion of Wal-Mart into a section of MU’s business won’t cause any collateral damage at least in the foreseeable quarters. Really, it requires the deployment of a lot of resources including funds for global expansion and for international regulatory approvals before Wal-Mart can match MU’s global money transfer services. On financial metrics, MU trades at a P/E of 11 which makes its stock cheaper than that of Xoom at 135 and MoneyGram at 18.9. MU’s quarterly revenue is about 45 times that of MGI and 4 times that of Xoom. In addition, MU has been paying a dividend in the last five consecutive years while MGI and Xoom are yet to pay any dividends.

Conclusion

Let us assume that the Republicans somehow finally got to come around and the bill got passed into law; though I try vainly to divest politics from business, what does it translate to for remittance businesses like Western Union? It means that many immigrants will assume legal status to live and work in the U.S. by accepting the terms of the bill and I bet three out of five of the 11 million immigrants would take the advantage of the amnesty with the help of some egghead experts like Bridge US. With an improved status, these people may likely get better paid jobs, earn more and may want to send money to their family back home meaning that over six million of this people may want to send money to their relatives. Since Western Union is the most global with more recognizable brand, two out of the three immigrants that have accepted amnesty would want to use WU - this would add over 4 million people to their customer base resulting in more earnings for the company and its shareholders.

In addition, with the World Bank’s robust growth projections in global remittances for 2014, 2015 and 2016, it is obvious that there will be enough spoils that will go round the table to all its operators and shareholders once the immigration reform bill is passed into law.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Politics Trading Ideas General

 

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