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MoneyGram-Ant Financial Merger On Track, High Costs Hurt

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On Aug 16, we issued an updated research on MoneyGram International, Inc. (MGI - Free Report) . During the most recently reported quarter, the company’s earnings of 24 cents per share surpassed the Zacks Consensus Estimate by 50% and increased 60% year over year.

Nevertheless, MoneyGram’s revenues from both the segments — Global Funds Transfer and Financial Paper Products — declined in the first half of 2017. The strengthened U.S. dollar and political instability, which have led to increased currency volatility, liquidity pressure on central banks and pressure on labor markets in certain countries, may continue to impact the company’s business for the rest of the year.

Moreover, competitors' pricing continues to affect the company’s growth in the United States to the U.S. channel, along with geopolitical issues in Africa, which have restricted its ability to transact. For its Financial Paper Products segment, the company expects the decline in overall paper-based transactions to continue primarily due to continued migration by customers to other payment methods.

The company’s investment revenue is expected to see a positive impact from increase in interest rates.

MoneyGram’s merger with Ant Financial Services Group, an affiliate of the Chinese ecommerce goliath Alibaba Group , is on track. In May, the company’s board of directors unanimously approved the amended merger agreement, pursuant to which each of its share will fetch $18 from the acquiring company.

The transaction, which is expected to close by the end of this year, will strengthen MoneyGram’s business, which operates in an intensively competitive and fast-changing payments industry.  While on its own, the company has to continually invest in business in order to keep pace with the constantly evolving industry, a union with a stable partner will make its journey easier.

Year to date, MoneyGram’s stock has gained 32.4% significantly outperforming the industry’s gain of 8%. Given that the merger is in progress, the stock should see further upside, in the coming quarters.

Nevertheless, the company continues to face high compliance-related expenditures ($43 million on average from 2014-2016) given regulators (state, federal and international) emphasis on enhanced scrutiny of anti-money laundering compliance programs, as well as consumer fraud prevention and education. For the first half of 2017, the compliance enhancement program cost the company $19.2 million.

Also, foreign exchange volatility, geopolitical issues and softness in business from oil producing countries will weigh on the company’s earnings in the coming quarters.

MoneyGram carries a Zacks Rank #3 (Hold). Some better-ranked players in the space are Blackhawk Network Holdings, Inc. LendingClub Corporation (LC - Free Report) and On Deck Capital, Inc. (ONDK - Free Report) . Each of these stocks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Blackhawk Network beat estimates in two of the last four quarters with an average positive surprise of 8.8%.

LendingClub surpassed estimates in three of the last four quarters with an average positive surprise of 13.3%.

On Deck Capital’s second-quarter earnings beat the Zacks Consensus Estimate by 71.43%.

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