On Apr 10, 2015, we issued an updated research report on MoneyGram International Inc. MGI. Most of the company’s growth momentum achieved in past couple of years has been eroded by severe downfall in the U.S.-bound business given the launch of Wal-Mart-to-Wal-Mart white-label product in 2014, which has directly cannibalized the U.S. market and intensified competitive pricing pressure.
Subsequently, MoneyGram witnessed drastic fall in both the top- and bottom lines in most of 2014, while U.S-to-U.S. transactions plunged 22% in 2014. Furthermore, projecting a reduction in its revenue share along with economic, geopolitical and regulatory challenges, MoneyGram has aggressively initiated cost-reduction programs across its global services, particularly, the introduction oflow prices at all 41,000 locations in the U.S. in Oct 2014.
While this had significant repercussions on the company’s financials in 2014, we expect the weak transaction volumes scenario to persist through most of 2015 as well. This is also evident from flat revenue expectations on a constant currency basis in 2015, while currency translations will likely face an adverse impact of 3% on the reported results.
Alongside, higher operating expenses, which rose 1% in 2013 and 7% in 2014, as well as currency and interest rate fluctuations have restricted growth of adjusted EBITDA, causing it to decline 6.2% in 2014, against the 6% growth witnessed in 2012 and 2013. Weak fundamentals further indicate sloppy EBITDA, as reflected by management’s expectation of an 8–12% fall in 2015. Moreover, operating cash flow growth has been fluctuating in the past years, witnessing a four-year (2009–2013) CAGR of a mere 6.1%, while tanking 60% in 2014.
Management also projects cash outlay of about $40 million under its new global transformation program by 2015-end ($30.5 million recorded in 2014), while another $80–90 million are expected as fraud losses through 2016 (about $49 million recorded in 2014). Moreover, deteriorated investment portfolio returns and raised debt levels indicate rising financial risks in future.
Nevertheless, MoneyGram’s dynamic acquisitions, product launches, strong network expansion and improvement in non-U.S. transaction volumes bode well for long-term growth. The self-service channel is gaining traction, wherein revenues surged 50% in 2012, 30% in 2013 and 35% in 2014. Such robust growth further raises optimism on management’s prior outlook of achieving 15–20% contribution from self-service revenues by 2017, up from 8% at 2014-end.
Earnings Review
This Zacks Rank #4 (Sell) stock delivered negative earnings surprises in three of the four quarters of 2014, with an average miss of 21.3%. The company’s fourth-quarter 2014 earnings of 13 cents a share lagged both the Zacks Consensus Estimate by 31.6% and the year-ago quarter figure by about 63%.
Overall, an unfavorable risk-reward profile in the near term led to downward estimate revisions for 2015 and 2016. The Zacks Consensus Estimate for 2015 and 2016 are now pegged at 52 cents and 88 cents per share, plunging 38.8% and 17.8%, respectively, in the last 60 days. Even on a year-over-year basis, earnings are expected to decline by 40.9% in 2015, indicating a bleak outlook for the year.
Key Picks in the Sector
Investors interested in the financial services industry could consider stocks like Apollo Residential Mortgage Inc. AMTG, General Finance Corp. GFN and Consumer Portfolio Services Inc. CPSS, all of which sport a Zacks Rank #2 (Buy).
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