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MoneyGram Up 80% YTD After Dismal Run in 2018: What's Next?

Zacks Equity Research

The year 2019 has been so far so good for MoneyGram International, Inc. MGI , which suffered in 2018 due to softness in revenues, stiff competition and high compliance cost.

Last year, the stock tanked 84% compared with the industry's decline of 25.9%, but staged a comeback this year, having rallied 80% year to date, while the industry registered 19% growth.

Western Union Co. WU, the leading money transfer company in the world, which lies ahead of MoneyGram, has gained 28% year to date. Other players in the same space such as PayPal Holdings, Inc. PYPL and Square Inc. SQ have gained 29% and 15%, respectively, during the same time frame.

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What Dragged the Stock Down in 2018?

MoneyGram grappled with increasing compliance controls, which impose limits on certain transactions. Also, the effect of tighter restrictions in corridors such as Nigeria and the United States has weighed on the company's revenues.  Moreover, the U.S.-to-U.S. market is a persistent challenge with an increasingly aggressive market pricing and a variety of new competitors, offering better services at attractive prices.

Apart from struggling with pressure on revenues, MoneyGram is also burdened with high cost of regulatory compliance. Therefore, from 2014 to 2017, the company incurred nearly $39 million (on average) for its compliance enhancement program. In 2018, it further spent $12.9 million, up 34% year over year, on compliance betterment program. High compliance requirements have suffered loss of agents and customers.

Plus, these expenses leave the company's margins stressed.
MoneyGram's high leverage was another concern. Its high debt ratio coupled with weak business is a caution for investors.

What has lifted the Stock in 2019?

Though the company’s revenues for the first six months have declined by nearly 13% year over year, business improvement initiatives undertaken by it are driving investors’ confidence to some extent.

Recently, MoneyGram received $30 million of equity investment from Ripple. The agreement allows MoneyGram to utilize Ripple's xRapid blockchain product, as well as XRP, Ripple's cryptocurrency, to facilitate cross-border settlements. The same will be done at lower cost and higher speed by the use of RippleNet— a network of more than 200 banks and payment providers— which makes it easy to connect and transact across the world.

The deal is in vein with the company’s aim to grow its Global Funds Transfer segment, which is its primary revenue driver.  This transaction is expected to reduce working capital needs and generate additional earnings and cash flow for the company.

MoneyGram is vociferously investing in its digital platform.  Recently, the company redesigned its online platform in the United States, named MoneyGram.com and also launched its mobile app. The company’s app and online platform are available in 24 countries. In the second quarter, its non-U.S. online transaction growth was more than 100% on a year-over-year basis.

Earlier in 2019, the company successfully completed its business restructuring and reorganization program, which was started in the first quarter of 2018. This program should generate $55 million of annualized saving, which would aid margins.

Another initiative undertaken to retain customers under its loyalty program, MoneyGram Plus Rewards, has been successful in bringing back impressive number of inactive customers in the first quarter of 2019. The company has also put up a dedicated call centre support for its members. These initiatives are driving growth in the number of returning customers, which will boost the company’s customer base.

MoneyGram has also streamlined its capital structure, by refinancing its first lien debt by $645 four-year term loan, extending its revolving credit agreement by $35 million, and adding a tranche of second lien debt of $245 million. It also sold $74 million in pension liabilities to reduce its future expenses and funding needs.

Will the Share Rally Further?

Further course of share price movement will depend upon the company’s ability to deliver performance through earnings numbers. Management expects revenue growth by late 2019. Also, the company’s cost-containment initiatives should aid margins.

The stock carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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Square, Inc. (SQ) : Free Stock Analysis Report
 
PayPal Holdings, Inc. (PYPL) : Free Stock Analysis Report
 
MoneyGram International Inc. (MGI) : Free Stock Analysis Report
 
The Western Union Company (WU) : Free Stock Analysis Report
 
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