We reiterated our recommendation on MoneyGram International Inc. ([stock]MGI[/stock]) at Neutral. The company’s fourth quarter loss was lesser than the Zacks Consensus Estimate, driven by decreased operating expenses and moderate revenue growth. Higher money transfer transaction volumeswere offset bylowerrevenue per transaction while investment revenues maintained its declining trend.
MoneyGram continues to grow its presence in high-growth potential markets while also improving its position in the weaker markets of Spain and Mexico. The company has also teamed up with Yahoo! ([stock]YHOO[/stock]) and is now utilizing the Internet, mobile phones and ATMs for money transfer. Further, the European Union payment services directives will allow MoneyGram to operate in all 27 EU countries under a single license.
In 2010, the company expanded its worldwide agent network by more than 19% year over year by significantly expanding its network in Asia-Pacific and Africa, Western and Eastern Europe, while also growing its presence in emerging markets such as India, Malaysia, Japan, Vietnam and China.
Further, MoneyGram continues to realign its investment portfolio with highly liquid assets in order to minimize risk and volatility. At the end of 2010, about 89% of the portfolio was in cash and cash equivalents and other liquid assets, while assets in excess of payment service obligations were $ 230.2 million, reflecting ample liquidity and sufficient assets to support growth in the near term.
Given the current instability in the global economic market, the company aims to utilize its stable liquid position for investment in infrastructure and other operational growth activities. As a result, MoneyGram remains consistent with its restructuring activities through the latest global initiative program in order to eliminate unnecessary costs and boost operating leverage in the long term.
Additionally, MoneyGram is working vigorously to improve its capital structure and eliminate the debt component in its balance sheet. By repaying its debt, the company will be able to eliminate its debt costs, mitigate its interest risk and be better positioned to address the convertible preferred stock in the upcoming years.
Furthermore, the recent debt refinancing and recapitalization also bodes well and is reflected by the improved ratings.Following the refinancing and recapitalization plan in March 2011, S&P ratings upgraded MoneyGram a notch closer to investment-grade status by lifting its credit ratings, while Moody’s assigned new debt ratings, both reflecting a stable outlook.
However, a significant portion of MoneyGram’s international revenue still comes from spread income. This can lead to volatility with exposure to interest rate fluctuations, reducing earnings visibility and the risk of liquidity sustainability, which is a prime need of this money transfer business. Also, once the Fed starts increasing rates, spread income could be negatively impacted.
Moreover, MoneyGram’s securities portfolio is yet to switch to gains. The deterioration largely resulted from the drop in the value of the company's holdings of asset-backed securities, which were negatively impacted by changes in the credit ratings of the securities or their underlying collateral.
Meanwhile, accounting for most of Financial Paper Products segment, the money order and official check outsourcing services has been adversely affecting the revenue over the past few years, also posing sufficient credit risk. Increased commission expenses and compliance spending will further exert pressure on operating margins at a time when operating revenues are already facing headwinds.
Even the latest global initiative program is a long-term plan, the positive effects of which will not be experienced before 2012, and will weigh on the cash flows in the upcoming quarters.
MoneyGram’s net investment revenues have been harshly hit by the global economic downturn. Net investment revenue plummeted to mere $ 20.6 million in 2010 from $ 31.9 million at the end of 2009 and $ 59.8 million in 2008 and $ 144.6 million in 2007.
As a result, investment yields shrunk badly to 0.58% in 2010 from 0.78% in 2009 and 3.33% in 2008 and 6.27% in 2007, primarily due to the dip in returns and persistent weakness across the industry, thereby hurting the bottom line. Given the sluggish recovery and intermittent jerks in the global economy, we do not expect any significant improvement in the near future.
Overall, with a steady recovery momentum in the global economy and improved operating efficiencies, we believe that MoneyGram should swing to profits this year and beyond. This will not only help the company retain the shareholders’ confidence but is also crucial for its sustainability in an industry where arch-rivals like Western Union Co. ([stock]WU[/stock]) have already captured a chunk of the market share in the money transfer business. Hence, currently we retain our Neutral stance on the stock that holds a Zacks #3 Rank.
MONEYGRAM INTL (MGI): Free Stock Analysis Report
WESTERN UNION (WU): Free Stock Analysis Report
YAHOO! INC (YHOO): Free Stock Analysis Report
Zacks Investment Research
Be the first to comment