We have reiterated our Neutral recommendation on MoneyGram International Inc. (MGI) based on improved capital structure and earning prospects due to the successful restructuring, offset by poor operating results in the second quarter of 2011 and the ongoing economic volatility.
MoneyGram reported a second quarter loss per share of $1.37, substantially lower than the Zacks Consensus Estimate of earnings of 2 cents and more than the loss of 31 cents in the year-ago quarter.
The successful completion of the recapitalization program has helped end the dilution of the stock and the continuous dividenred shares, thereby simplifying MoneyGram’s complex capital structure. With the improved capital structure, the company is better positioned to address the convertd payment on preferible preferred stock in the upcoming years.
Additionally, MoneyGram continued to realign its investment portfolio with highly liquid assets in order to minimize risk and volatility. As a result, the company’s securities portfolio finally swung to profit in the second quarter of 2011.
Moreover, MoneyGram continues to grow its international presence in high-growth potential markets while also improving its position in the weaker markets. The company is also utilizing the internet, mobile phones, kiosks and ATMs for money transfer.
Besides, MoneyGram’s partnership with industry leaders such as Fiserv Inc. (FISV) and SMART Communications not only adds value and convenience to its existing customers but also helps in network expansion. Moreover, the company’s competitive strength and share have been increasing in the global remittances market as most of its peers are small, under-capitalized, not well-organized and face difficulty in operating under the increasingly stringent global regulatory requirements.
On the flip side, a significant portion of MoneyGram’s international revenue still comes from spread income. This can lead to volatility through 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 Federal Reserve starts increasing rates, spread income could shrink.
Additionally, MoneyGram’s net investment revenues have been harshly hit by the global economic downturn. A decline of 16.8% year over year was witnessed in the first half of 2011, when investment revenue shrunk to $9.9 million.
Moreover, MoneyGram’s growth is limited by the poor business diversification, relatively high agent concentration in its global funds transfer segment and exposure to regulatory risk. Even the growth from its money transfer business is largely offset by the declining bill payment revenues in the global fund transfer segment.
Further, MoneyGram is also been being probed by a federal grand jury in relation to its consumer anti-fraud and anti-money laundering program matters for the period 2004 to early 2009. Any unfavorable results from the investigation could lead to potential damages, which could pressurize margins and cash flow.
The Zacks Consensus Estimate for third quarter earnings is currently at 3 cents per share, up about 110% year over year. Of the 3 firms covering the stock, none revised their estimates in the last 30 days.
For 2011, earnings are expected to be about 13 cents per share, again up about 110% year over year.
MoneyGram currently caries a Zacks #2 Rank, implying a short term Buy rating.
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