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On Jul 11, we downgraded our recommendation on MoneyGram International Inc. (MGI - Analyst Report) to Underperform based on its bleak growth prospects amid the current economic headwinds and higher expenses.

Why the Downgrade?

On May 2, MoneyGram reported first-quarter 2013 earnings per share (EPS) of 24 cents. While EPS was in line with the Zacks Consensus Estimate, total revenue of $340.5 million missed the mark of $342 million. However, both EPS and revenues were higher than the year-ago numbers by 4.3% and 7%, respectively.

Higher transaction volumes and free cash flow were partially offset by lower investment income and higher operating and commission expenses, overall, reducing margins.

Following the first quarter results,the Zacks Consensus Estimate for both 2013 and 2014 have remained intact at $1.20 a share and $1.40 per share, respectively, over the last 60 days. Consequently, with the Zacks Consensus Estimate for 2013 and 2014 depicting no clear directional pressure on the stock in the near term, MoneyGram now has a Zacks Rank #3 (Hold).

Cause for Concern

MoneyGram’s investment portfolio has been consistently deteriorating given the low interest rate environment across economies. Moreover, increased coverage in different countries exposes the company to foreign currency fluctuations. Further, increased dependence on the money transfer business given the constant descent of the financial products segment is adversely affecting margins and operating cash flow.

At such a juncture, higher operating and commission expenses only add to the woes, thereby restricting EBITDA growth. Posting 5.8% growth in 2012, adjusted EBITDA also lagged management’s guidance of 7–9%, which has been further lowered to 3–6% for 2013.

Other Stocks to Consider

While we prefer to avoid MoneyGram until it gains some traction, other stocks that are outperforming in the financial sector include Moody’s Corp. (MCO - Analyst Report), American Safety Insurance Holdings Inc. and HCI Group Inc. (HCI - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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