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MoneyGram International Inc. (MGI - Analyst Report) reported first-quarter 2012 earnings per share of 22 cents, a couple of cents higher than the Zacks Consensus Estimate. However, the reported earnings soared from year-ago quarter’s loss of 21 cents a share.

Operating net income in the reported quarter excluded legal expenses of $3.6 million or 3 cents per share, restructuring and reorganization costs of $5.8 million or 5 cents per share and stock-based compensation costs of $3.5 million.

Nonetheless, including these expenses, reported net income available to common shareholders improved to $10.3 million or 14 cents per share from a net loss of $21.7 million or $2.08 per share in the year-ago quarter. Excluding preferred dividend and other payouts, the company had reported net income of $14.0 million in the year-ago quarter.

Higher money transfer transaction volumes and higher fee and other revenue drove the top line, while absence of preferred dividend payouts, disciplined expense management, lower interest expenses helped the bottom line and margins’ expansion. However, these were mostly offset by lower investment income along with higher tax and other expenses.

Total operating expenses climbed 7.6% year over year to $282.2 million. However, interest expense decreased by 13.1% from the prior year to $17.9 million as a result of continued delevering activities and the refinancing initiated in May 2011. Subsequently, operating income ascended 13.2% year over year to $35.9 million.

MoneyGram’s total revenue for the quarter was $318.1 million, up 8.2% from the year-ago period and exceeded the Zacks Consensus Estimate of $315 million. While fee and other revenue increased 8.6% year over year to $314.9 million, investment revenue plummeted 20% to $3.2 million.

MoneyGram has also been gaining traction with the raised momentum in self-service and new channel revenue that jumped 61% during the reported quarter and represented 4.8% of money transfer revenue. Additionally, MoneyGram Online delivered strong revenue and transaction growth, both in excess of 30%, primarily helped by the recent launch of MoneyGram Online in the U.K.

Segment Results

In the Global Funds Transfer segment, MoneyGram’s revenue rose 9.7% year over year to $296.1 million. Money transfer transaction volume increased 15%, while money transfer fee and other revenue grew 12%year over year to $268.3 million and 13% on a constant currency basis.

Besides, global agent locations reached 275,000, an increase of 18% over the prior-year quarter. However, bill payment transaction volume dipped 5% year over year, whereas, fee and other revenue declined 8.3% to $27.6 million from the prior-year quarter. Nevertheless, operating margin improved to 11.2% from 9.8% in the year-ago quarter, while adjusted operating margin also escalated to 15.1% from 12.2% in the year-ago quarter.

Total money transfer transactions originating outside the U.S. escalated 17% from the prior-year quarter. Transaction volume to Mexico increased 19% year over year, significantly improving for the tenth-consecutive quarter. Besides, MoneyGram’s transactions originating in the U.S. increased 15% year over year, while U.S. outbound transaction growth increased 12% over the prior-year period.

In the Financial Paper Products segment, MoneyGram’s total revenue declined 9.2% year over year to $21.7 million, reflecting reduced investment, money order and official check revenues. Conversely, operating margin improved to 41.5% from 35.1% in the year-ago quarter. Even adjusted operating margin escalated to 47.4% from 39.1% in the year-ago quarter, based on low commission expenses.

Liquidity

As of March 31, 2012, MoneyGram had cash and cash equivalents of $2.55 billion (down from $2.57 billion at 2011-end), net receivables of $1.21 billion (down from $1.22 billion) and available-for-sale investments of $93.1 million (down from $102.8 million).

The company ended the reported quarter with $814.3 million of outstanding debt (marginally down from $814.6 million at 2011-end), while assets in excess of payment service obligations of $223.6 million (up from $211.7 million). Free cash flow rose to $28.2 million from $25.4 million in the year-ago quarter, primarily driven by strong revenue growth and lower interest expense.

Guidance

For 2012, management reiterated its expectation of total revenue growth of 7–9%, while adjusted EBITDA growth is forecasted in the band of 9–11%. This is consistent with the company’s long-term goals.

Business Update

During the reported quarter, MoneyGram expanded its agreement with Grupo Elektra and added 1,800 locations in Mexico, completed a 3-year expansion of services with over 10,000 locations across the Bank of China network and added over 1,000 locations in the Indian Subcontinent with Thomas Cook, India Post, and UAE Exchange. The company also strengthened its ties with Fiserv Inc. (FISV - Analyst Report) and fortified its footprint in Venezuela.

Moreover, the company also broadened its network by adding about 1,000 locations in the Russia and CIS through National Bank of Uzbekistan and Sberbank Ukraine. Further, MoneyGram strengthened its position in Bulgaria as it began the roll-out of 1,000 PO Bulgaria locations, while also renewed and expanded its relationship with Speedway SuperAmerica, a convenience store chain with approximately 1,375 locations, to now include the company’s self-service MoneyGram Xpress money transfer product.

Peer Take

Earlier this week, MoneyGram’s peer Western Union Co. (WU - Analyst Report) reported first quarter earnings of 40 cents per share, in line with the Zacks Consensus Estimate. Earnings increased 14% on a year-over-year basis, mainly on the back of strong margin improvement in the Global Business Payments unit and lower share count.

MoneyGram carries a Zacks #3 Rank, which translates into a Hold recommendation over the short term. Additionally, over the medium-to-long term, we maintain a Neutral rating.

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