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Summary

  • Walmart's new money transfer service will cause a significant reduction in MoneyGram's revenue.
  • Walmart-2-Walmart transfers account for approximately 13.6% of MoneyGram's total revenue.
  • Gross margin is approximately 40% on MoneyGram's Walmart-2-Walmart business, and it is unlikely that MoneyGram will be able to materially reduce SG&A costs.
  • EPS may decline more than 50%, and the stock may fall more than 40%.

MoneyGram (NASDAQ:MGI) is a leading global money transfer and payment services company. Its primary consumers are persons who may not be fully served by other financial institutions, which it refer to as unbanked or underbanked consumers. MGI has an extensive global network of agent locations and company-owned retail locations. (10-K)

Relationship with Walmart (WMT)

MoneyGram has a long (15+ year) relationship with Walmart.

Walmart is currently MGI's largest agent, and it is estimated that 34% of MGI's money transfer revenue is from Walmart and 40% of MGI-Walmart transactions are Walmart-2-Walmart. The balance 60% is roughly evenly split between Walmart to non-Walmart MGI locations and non-Walmart MGI locations to Walmart.

Walmart launches a Walmart-2-Walmart money transfer service in partnership with Ria

On April 17, 2014, Walmart announced that its new low-cost money transfer service will allow customers to transfer money to and from more than 4,000 Walmart stores nationwide for up to 50 percent less than similar offerings on the market. The company said that it plans to challenge the status quo and drive down prices for its customers.

Financial implication of Walmart news for MoneyGram

Walmart's new money transfer service will have an immediate and significant impact on 13.6% of MoneyGram's revenue that is derived from Walmart-2-Walmart transactions. While MoneyGram may reduce prices to match the 50 percent reduction that Walmart is offering, we do not see how two directly competing services will operate under the Walmart umbrella. If one has to pick a winner, it is safe to say that Walmart's own money transfer service will prevail. Gross margin on this business for MoneyGram is approximately 40%. It is unclear how much, if any, sales, general and administrative (SG&A) expenses MoneyGram will be able to reduce.

There will be a small initial impact and a larger longer-term impact on another approximately 13% of MoneyGram's revenue which is from US-2-US transfers, but not involving a Walmart location. As Walmart uses its unparalleled nationwide relationship with low-income customers, who are the core MoneyGram customer base, some off-Walmart transfers will move to Walmart locations.

While there is no news about international expansion of Walmart's money transfer business, we expect that this will happen over time. Walmart has a large presence in Mexico, and if it expands Walmart-2-Walmart transfers to its Mexico stores, this will have an additional significant negative impact on MoneyGram, which has a large US-2-Mexico business.

Valuation: 40%+ downside

FY14E (Pre-WMT news)FY14E (Post-WMT news)ChangeAssumptions
Revenue$1,600$1,437($163)Revenue declines by 75% of the 13.6% of WMT-2-WMT business via price reduction and/or loss of business
Gross Profit$858$793($65)40% gross margins on WMT business
Gross Profit %54%55% Slight increase in margins, since WMT business was lower-margin than non-WMT business
SG&A($697)($697)
Operating Income$161$96($65)
Operating Income%10%7% Lower operating income due to inability to materially reduce SG&A
Interest($44)($44)
PBT$117$52
Tax($33)($15)
Tax rate-28.3%-28.3%
PAT$84$37($47)
Number of shares60.2960.29
EPS$1.39$0.61-56%
PE 13.00 While WU currently trades at a 10.9x forward PE, MGI has traded at a higher PE historically
MPS $7.98
Downside -42%

This 42% downside may prove to be conservative if MGI loses more than 75% of its WMT-2-WMT business; if WMT makes material inroads into MGI's non-WMT US-2-US business; or if WMT expands its offering to US-Mexico transfers.

Other points

MoneyGram has a non-investment grade balance sheet, rated BB- (negative watch) per S&P.

Short interest as a percentage of float is small (2.8%), and the stock is currently easy to borrow.

WesternUnion (NYSE:WU), the largest player in the money transfer industry, is not materially affected by the Walmart news, since it has no relationship with Walmart, and because over 85% of WU's transactions involve at least one non-US location.

Conclusion

Walmart's newly introduced money transfer service will cause a greater than 10% reduction in MoneyGram's revenue and greater than 50% reduction in EPS. The stock should be more than 40% lower.

Source: MoneyGram: Impact Of Wal-Mart News Underappreciated, 40%+ Downside

Additional disclosure: KL Investment Partners may change or exit its position (buy or sell shares) without updating this article and without informing the Seeking Alpha community.