The stock of MoneyGram International Inc. (MGI - Free Report) fell out of favor with investors. This is to a large extent corroborated by its share price movement that suffered from a number of reasons ranging from the blockage of its merger with Ant Financial, weakness in its money transfer business, which accounts for a major chunk of the company’s revenues, increased compliance costs as well as ever-increasing competition in the dynamic money transfer industry.
The stock of the money transfer company has lost 44% in a year’s time, underperforming the industry’s growth of 6%. This performance looks grave when compared with other superior players’ performance.
To put this into perspective, shares of Virtu Financial, Inc. (VIRT - Free Report) grew 110% while Houlihan Lokey, Inc. (HLI - Free Report) and Ameican Express Co. (AXP - Free Report) grew 47% and 22%, respectively, over the same time frame.
What’s Dragging the Stock?
The stock seems to be suffering from industry-wide as well as company-specific headwinds. Industry headwinds include – growing competition from a number of players entering the industry; increase in the number of ways money is being remitted across the globe; heightened regulation as governments across the globe is seeking to crack down and check fraudulent money transfers; economic and political unrest in some parts of the globe and foreign exchange volatility.
While these factors should have adversely impacted the shares of its ilk, that is not the case here. Therefore, it seems that the company continues to reel under its own headwinds. These are:
Failed Merger With Ant Financial: MoneyGram’s merger with Ant Financial Services Group was called off after the regulators showed a red flag to the deal. The partnership with Ant Financial would have strengthened Moneygram, which operates in an intensively competitive and fast-changing payments industry. On its own now, the company will have to continually invest in businesses to keep pace with its peers.
Pricing Pressure: Pricing pressure continues to impact negatively on company’s growth in the U.S. to U.S. channel as well as the economic issues in the Middle East and Africa, which have restricted its ability to transact in certain markets. These trends are expected to put pressure on revenues in 2018. We note that revenues have declined from 2013-2015. After a hiatus in 2016, it dipped again in 2017. This lackluster revenue performance must have dragged its share price.
Increased Compliance Cost: MoneyGram also faces compliance risks associated with regulations, governing its business and cost structure in numerous jurisdictions worldwide. Such factors further restrict its ability to invest in new remittance technologies, posing threats to its long-term competitive and operating leverage. From 2014-2016, the company incurred nearly $43 million (on average) in its compliance enhancement program. In 2017, the compliance enhancement program cost the company $28 million. Such high compliance would drain its bottom line when its top-line growth is already suffering.
Weakness in Certain Markets: In Saudi Arabia, the company continues to see a slowdown in transactions and revenues due to economic challenges which have resulted in lower remittance volumes. Economic issues in the Middle East and Africa have restricted its ability to transact in certain markets. Though the company has been closely watching these countries, given the complexities of the issues, it does not expect the situation to improve in near future. Also, new central bank capital controls in Nigeria were recently implemented, restricting sends to 50% of received volume. This occurred when the company was growing rapidly in Nigeria. These regulations are currently inhibiting the company’s business in this country.
Can the Stock Turn Around?
We do not expect any respite in the near term as economic issues in the Middle East and Africa is expected to continue. Though the company has been closely watching these countries, given the complexities of the issues, it does not expect the situation to improve in near future.
Also, the company is being probed by a federal grand jury in relation to its consumer anti-fraud and anti-money laundering program during 2003 to early 2009, among many other government investigations and litigations. Any reverse result from the investigation will indicate a potential liability for damages, which could put pressure on margins and cash flow.
The company is compelled to make continuous investments in growing its digital platform to stay ahead in the industry that is witnessing increased percolation of technology. These investments might exert pressure on the bottom line.
We have a little visibility of the company’s earnings performance for the coming quarters and therefore we choose to remain on the sidelines.
MoneyGram carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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