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MoneyGram Up 17% YTD After Down 84% in 2018: What's Next?

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The year 2019 has been so far so good for MoneyGram International, Inc. (MGI - Free Report) , which suffered in 2018 due to softness in revenues, stiff competition and high compliance cost.

Last year, the stock tanked 84% compared with the industry’s decline of 25.5%. But the stock staged a comeback this year, having rallied 17% year to date, almost in line with the industry’s growth of 16.8%.

What Dragged the Stock Down in 2018?

MoneyGram has been grappled with increasing compliance controls, which impose limits on certain transactions. Also, the effect of tighter restrictions in corridors such as Nigeria and the United States has weighed on the company’s revenues.  Moreover, the U.S.-to-U.S. market is a persistent challenge with an increasingly aggressive market pricing and a variety of new competitors.

Apart from struggling with pressure on revenues, MoneyGram is also burdened with high cost  of regulatory compliance. Therefore, from 2014 to 2017, the company incurred nearly $39 million (on average) for its compliance enhancement program. In 2018, the company further spent $12.9 million, up 34% year over year, on compliance betterment program. High compliance requirements have suffered loss of agents and customers. Plus, these expenses leave the company’s margins stressed.

MoneyGram’s high leverage has been another concern. Its net debt-to-capital ratio is 107% compared with the industry average of 32%. This high debt load is not favorable, especially at the time when the company’s revenues are reeling under pressure.

Factors Favoring the Stock in 2019

The stock has so far appreciated in the ongoing year after investors gained confidence in the company’s ability to place itself suitably for growth by developing its digital platform, de-risking its business and controlling cost.
Although revenues declined in 2018, which was due to strategic downsizing of business in risk prone arenas, the move has nonetheless pleased investors. Further, such a step will provide sustainability to the company’s revenue stream.

The company’s restructuring drive has also aided the stock. The program reflects the organization’s alignment with the delivery of new digital touch-points for customers and agents as well as the optimization of the company's global network. The streamlining project is substantially complete and realized efficiencies that led to a $30.5-million reduction in expense during 2018 and post culmination, the company expects to realize $55 million of efficiencies on an annualized basis.

In the coming quarters, we expect the stock to gain as the company’s growth initiatives start to yield results and investors gain more insight about the company’s developmental prospects.

Zacks Rank and Stocks to Consider

MoneyGram carries a Zacks Rank #3 (Hold). Investors interested in the financial transaction services space can look into some better-ranked stocks like Virtu Financial, Inc. (VIRT - Free Report) , Fidelity National Information Services, Inc. (FIS - Free Report) and Euronet Worldwide, Inc. (EEFT - Free Report) .

Virtu Financial provides market making and liquidity services to the financial markets around the globe. The company sports a Zacks Rank #1 (Strong Buy) and came up with average trailing four-quarter positive surprise of 0.63%.

Fidelity National Information works as a financial services technology company worldwide. It has a Zacks Rank of 1. The company managed to deliver positive results in all the trailing four reported quarters, the average being 2.72%.

Euronet provides payment and transaction processing and distribution solutions worldwide. It carries a Zacks Rank #2 (Buy). The stock pulled off average four-quarter beat of 2.68%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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