WU Western Union Company

We have downgraded our recommendation on MoneyGram International Inc. (MGI) to Neutral based on the current sustainability factor. The company reported third-quarter 2011 earnings of 3 cents per share, in line with the Zacks Consensus Estimate but significantly higher than the loss of 30 cents per share in the year-ago quarter.

Higher money transfer transaction volumes and higher fee and other revenue drove the top line, while absence of preferred dividend payouts, lower tax and interest expenses helped the bottom line. However, these were partially offset by lower investment income and higher operating expenses.

With a significant portion in international income, MoneyGram is severely exposed to interest rate and currency fluctuations. This further reduces earnings visibility and increases the risk of liquidity sustainability, which is a prime need of this money transfer business.

Amid this economic volatility, the effect of the latest reverse stock split and secondary stock offering had almost a zilch on the company’s capital and cash position, although it enhanced the market price, thereby helping investors gain some confidence in the near term.

Meanwhile, accounting for most of financial paper products segment, the money order and official check outsourcing services have been adversely affecting the revenue over the past few years, also posing sufficient credit risk. The company’s growth is limited by the poor business diversification, relatively high agent concentration in its global funds transfer segment and exposure to regulatory risk.

Moreover, the company continues to expand in new emerging verticals, which generates lower revenue per transaction compared to the traditional consumer credit verticals, and also continues to experience secular and economic declines. Besides, net investment revenues have been harshly hit by the global economic downturn. An annualized decline of 15.1% was witnessed in the first nine months of 2011, when investment revenue shrunk to $13.8 million. Net investment revenue also plummeted to mere $20.6 million in 2010 from $31.9 million in 2009, $59.8 million in 2008 and $144.6 million in 2007.

On the flip side, the successful completion of the recapitalization program has helped end the dilution of the stock and the continuous dividend payment against the preferred shares, thereby simplifying MoneyGram’s complex capital structure. This has also helped the company to refinance its existing credit facilities with a new $540 million facility, comprising a revolver and term loan with 5.0 and 6.5 years of maturity, respectively, thereby extending the senior debt maturities to 2017 from 2013.

Overall, the positive effects of the refinancing and recapitalization have not only aided the company in generating earnings after posting losses for about nine previous quarters but also bode well for healthy ratings position. The rating agencies have affirmed a stable outlook, thereby validating a promising growth outlook in future.

Despite the unfavourable economic condition of the U.S. housing market and the growing concern for immigration, MoneyGram showed a modest growth in the money transfer business. Increasing demand in transaction volumes both in domestic and international markets has paved the way for growth over the past several quarters.

Going ahead, the global market for remittance services is expected to be stable given the protracted and favourable secular trends of labour force migration. Hence, even in the longer term, money transfer will remain the driving force at MoneyGram due to increasing demand. This also appears to be favorable for maintaining a strong competitive position, against arch-rival Western Union Co. (WU), in the money transfer sphere.

Given the pros and cons, MoneyGram’s fourth quarter earnings are currently pegged at 18 cents per share, significantly up by about 107% year over year, reflecting continued improvement.  However, for 2011, loss of $1.37 per share is estimated, given the losses incurred in the first half of the year.

Additionally, the company carries a Zacks Rank #3, implying a short-term Hold rating and long-term Neutral stance on the stock.

 
MONEYGRAM INTL (MGI): Free Stock Analysis Report
 
WESTERN UNION (WU): Free Stock Analysis Report
 
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