On Sep 6, 2013, we upgraded leading money transfer service provider MoneyGram International Inc. (MGI) to Neutral, based on improving operating leverage and hiked guidance. However, volatility in currencies and interest rates partially offset growth.
Why the Upgrade?
MoneyGram has witnessed some moderation since its second-quarter 2013 results on Jul 25. While the earnings per share of 29 cents missed the Zacks Consensus Estimate by a penny, total revenue of $365.1 million beat the same benchmark by 2.3%. Nevertheless, both earnings and revenues topped the year-ago quarter results by 26.1% and 10.6%, respectively.
The top line was driven by higher money transfer transaction volumes, higher fee and other revenues along with improved investment income. Meanwhile, lower operating and interest expenses supported the bottom line and free cash flow. However, weak performance in financial products segment along with higher commission expenses restricted the upside in margins.
Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 dipped 5% to $1.14 per share in the last 60 days. Moreover, earnings estimates for 2014 is pegged at $1.34 per share, down 4.3% for the similar period. However, the current estimates reflect 18% year-over-year growth in 2013 and 17% upsurge in 2014. With the Zacks Consensus Estimates for both 2013 and 2014 treading slightly downward, the company now has a Zacks Rank #4 (Sell).
Despite the unfavorable global economic condition, MoneyGram showed modest growth in the money transfer business, driven by successful penetration into the unexplored markets and improved position in the weaker markets. The company is also gaining traction within self-service and new channel revenue sources.
Given the protracted and favorable secular trends of labor force migration, we believe that the global market for remittance services is expected to be stable. The growth potential is also justified by management’s top-line growth guidance of 7–10% for 2013, up from the prior estimate of 6–9%. Strong competitive edge, adequate capital position and strong cash flow outlook further score well with the ratings agencies.
However, depleting revenue from financial paper products segment and returns from investments as well as high commission expenses affect the margins unfavourably. The adverse effect of foreign currency and interest rate fluctuations have also restricted management’s adjusted EBITDA growth projection of 3–6% in 2013. Overall though, MoneyGram has the potential to outperform once the economic headwinds subside.
Other Financial Stocks That Warrant a Look
While we prefer to remain on the periphery for MoneyGram, other outperformers of the financial sector include Fleetcor Tech Inc. (FLT), XOOM Corp. (XOOM) and Official Payments Holdings Inc. (OPAY). All these stocks carry a Zacks Rank #2 (Buy).
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