The stock of MoneyGram International, Inc. MGI seems to have fallen out of favor with investors, given a host of headwinds faced by the company, such as a highly competitive money transfer market, loss of business in some corridors, high compliance cost and a weak balance sheet.
In the recently reported first-quarter 2019 results, MoneyGram disappointed investors by sustaining a loss of 6 cents per share, missing the Zacks Consensus Estimate by a huge 175%. In the year-ago quarter, the company reported earnings of 15 cents per share.
The company’s total revenues declined 15% year over year and missed estimates by 4%. Adjusted EBITDA, which reflects profitability, also declined 25% year over year.
This was the second consecutive quarter of earnings miss. In the fourth quarter of 2018, the company lagged earnings estimates by 90%.
The company’s lackluster performance led to its share price dive by 74% in a year’s time, significantly underperforming its industry’s decline of 7.8%.
The stock’s performance looks all the more grave when compared with other similar companies in the money transfer space such as The Western Union Co. WU, which has declined only 2%. On the contrary, Square Inc. SQ and PayPal Holdings, Inc. PYPL have gained 21% and 44%, respectively, during the same time frame.
Given that all these companies operate mostly in the same market, there must be some company specific factors adversely affecting MoneyGram.
Let’s see the factors draining the stock
MoneyGram has been impacted by 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 brought the company’s revenues under pressure. The U.S.-to-U.S. market is a persistent challenge with an increasingly aggressive market pricing and a variety of new competitors. Consequently, the revenues have been declining from past two years and continued to slide in the first quarter of 2019.
Apart from weak revenues, MoneyGram also faces compliance risks associated with regulations governing money transfer companies. From 2014 to 2017, the company incurred nearly $39 million (on average) in its compliance enhancement program. In 2018, the company further incurred $12.9 million, up 34% year over year toward the same program. High compliance requirements have suffered loss of agents and customers in some of its corridors, thus eroding business.
MoneyGram’s high leverage has been another concern. Its net debt-to-capital ratio is 120% compared with the industry average of 38%. This high leverage is not favorable, especially at the time when the company’s revenues remain stressed. Its interest earned ratio is 0.3 times which is extremely low compared with the industry average of 5.8, which reflects the company’s vulnerability to cover interest cost. Default in this regard can cause another layer of issue such as credit rating downgrades from rating agencies.
What Lies Ahead?
Earlier this week, rating agency Moody's Investors Service downgraded MoneyGram’s Corporate Family Rating (CFR) to B3 from B2 and existing senior secured credit facility rating to B3 from B2.
The rating agency assigned a B2 rating to the proposed amended first lien credit facility and a Caa2 rating to the proposed second lien term loan facility. The outlook remains negative.
The company has recently taken a second lien term facility of $245 million which will be used to payoff balance under first lien term facility. Also, the proposed amendment of the first lien revolver and term facilities will include extension of maturities and an increase in interest rates, which will lead to an increase in interest cost. This might also lead to just the breakeven or very little positive cash flow over next 12 to 18 months.
Per Moody’s, the company’s revenues and EBITDA margin are expected to remain under pressure till stabilization levels are achieved, which could be late 2019 or early 2020.
The company also expects full-year 2019 revenues to decline approximately 2% to 4% and adjusted EBITDA to decline by approximately 8% to 12%, both on a constant currency basis.
The weak projections could dampen the stock’s performance in the coming quarters.
MoneyGram carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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