Given the current market recovery factor and valued growth indicators, we are upgrading our recommendation on the shares of MoneyGram International Inc. (MGI) to Outperform from Neutral.
Although the current economic turmoil has weakened both the revenue growth and the operating leverage of MoneyGram, we believe that once the economy stabilizes, it will have a substantial positive effect on its earning power of the company.
MoneyGram’s fourth quarter loss of 4 cents per share was higher than the Zacks Consensus Estimate of a loss of 2 cents. However, the results came in better than the last couple of quarters, primarily due to a growth in its core money transfer business on higher transaction volumes and lower-than-expected operating expenses.
Despite the unfavorable economic condition of the US 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. Even in the longer term, money transfer will remain the driving force at MoneyGram due to increasing demand.
MoneyGram intends to grow by delivering better value to its customers in order to drive market share gains. It plans to expand its distribution channels, create new products and services, and make acquisitions and strategic alliances. Since its inception in 2004, the company has grown inorganically through mergers, acquisitions and spin-offs.
Further, MoneyGram has been expanding its money transfer business across globe through various recognized financial institutions. In 2009, the company had partnered with Alpha Bank to add about 165 additional money-transfer locations in Serbia. Beginning 2010, MoneyGram expanded its money transfer services through Corner Cash Keszpenz Zrt in 11 cities across Hungary.
Additionally, the company has also partnered with the Bank of China to expand its money transfer network through 10,000 domestic branches of the Chinese bank in the upcoming years. As a result, MoneyGram remains consistent with its restructuring and reconstructing activities to eliminate unnecessary costs and gain operating leverage in the long term.
MoneyGram is vigorously working to improve its capital structure and eliminate the debt component of its balance sheet. Recently, the company has made a prepayment of $40 million of its debt, thereby reducing its total debt significantly by 19%, repaying a total of $187 million in 2009. By repaying its debt, the company will be better positioned to address the convertible preferred stock in the upcoming years. However, we do not expect any significant additional debt pay-downs until the middle of 2010.
While the growing presence in high potential markets continues to strengthen MoneyGram’s revenue stream, declining debts reflect a sturdy capital position. Overall, we believe that the company has the potential to overcome the impact of the volatile US dollar against other currencies and additional losses in its investment portfolio, once the global economy rebounds to its historical highs.
Read the full analyst report on “MGI”
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