MoneyGram: Starting To Deliver, Time To Stick With It

| About: MoneyGram International, (MGI)

Summary

Improving fundamentals should be able to shrug off any near-term volatility related to the fast-changing macroeconomic environment.

Both non-U.S. and U.S. outbound businesses continue to be strong, and the digital initiatives are bearing results.

The stock is up 20-25% from the previous note, but the mismatch between the fundamentals and expectations continues to be large.

Since my previous note on MoneyGram International (NYSE:MGI) earlier this year, the stock, as well as business fundamentals, has improved, but the improvement so far may just be the beginning of what could be a long trend, the pace of which may even accelerate over the coming months, thus worthy of another look around current levels.

The long thesis from a macro standpoint relied on a constant growth in migrant population, increasing regulatory scrutiny leading to shrinking illegal money transfer channels, an expectation of a favorable interest rate environment, and potential improvement in the pricing environment after years of moving down. In the meantime, the company was set to benefit from the renewal of the deal with Wal-Mart (NYSE:WMT) and a double-digit growth in transactions.

Remittance industry is in right shape to handle any short-term macroeconomic volatility

One can argue that there are still some lingering macro overhangs, be it the uncertain macroeconomic outlook, weak U.S.-to-U.S. transfer trends, political uncertainty in some parts of the world, the strengthening U.S. dollar that is leading to increased currency volatility, and pressure on labor markets in certain geographies, but by and large, the existing players are in a much better position.

Near term, the result of the "Brexit" vote should have a limited impact on MoneyGram, considering the company does not have any market across Western Europe that represents more than 4-5% of the business.

The competitive pressures in the space are getting a more realistic assessment, partly due to high-profile startups, which have been successful in attracting coverage, but failing to show any meaningful traction compared to established players or posing any sort of challenge on the pricing front.

Geographically, historically strong markets in the Middle East, like Saudi Arabia, Libya and Angola, are being well compensated by decent growth in Mexico, parts of Africa, like Nigeria and Ghana, Europe, pockets of Asia and a stable U.S. Even though international cash remittance has slowed, transaction volume growth has compensated for the slowdown.

The ever-increasing regulatory scrutiny also seems to be working in favor of the big money transfer companies like MoneyGram and Western Union (NYSE:WU). Most of the large banks have either stopped or drastically reduced the cross-border money transfer business and instead opted for partnerships.

Concerns over money laundering have led to increased regulation and compliance training, which has restricted the money transfer operations out of mom-and-pop convenience stores and helped the large companies. Indeed, the state financial regulator licensed money transmitters have declined 12% during the first quarter while companies that operate in multiple states increased by 17% during that time frame.

Business changing ahead to the changing times

Source: MoneyGram

As for MoneyGram, the U.S.-to-U.S. business is not in the driver's seat, the digital initiatives are bearing results even if lacking in the Street coverage compared to the startups in the space, and the operating leverage is visible.

Figures from the latest quarter results.

Source: MoneyGram

Other than the weakness in the U.S.-to-U.S. results, mostly due to the weak transactions in the barely profitable business of less than $100 transfers, there was strength across the board. As the chart above shows, both U.S. outbound and non-U.S. businesses grew at a double-digit rate, which combined makes up close to 87% of the total revenue.

Rather than being a threat, the digital channel has started to work for the company, with 13% of the total money transfer revenue and 15% of the money transfer transactions coming from the digital solutions. Looking at the growth rate and popularity of mobile wallets and account deposit expansion in Europe and Asia, the company's goal of driving 15-20% of the money transfer revenue from digital by 2017 may be proven conservative.

Operationally, the business has started to benefit from restructuring activities, as reflected in improved margins and operating cash flow improving by $45 million in the latest quarter. Adjusted EBITDA margin has increased to $70 million in the latest quarter, up 29% on a constant-currency basis and 19.5% of the revenue, significant for a business with an enterprise value of $1.18 billion.

This is just the beginning

Improving fundamentals seem to be repositioning the business for a better trading multiple than the current 6-7 times forward earnings. Secondly, the name should start commanding an acquisition premium and considering the positive market reaction that Western Union received last year when rumors regarding the combination started, one can assume the acquisition premium to be respectable.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.