What's Driving Sales at this Company?

Lalit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The money transfer industry came under pressure after the 2008 recession. With the high unemployment rate, the remittance business slowed down. But with confidence back in the economy and the unemployment rate on decline, the remittance industry has shown signs of recovery. MoneyGram (NASDAQ: MGI) is the second largest money transfer services company after Western Union (NYSE: WU) with a market share of 5% in the industry. The company is well placed to gain from ongoing macro recovery. Below, I have discussed some of the key reasons that I'm bullish on the company.

Private equity has shown interest in buying out MoneyGram

According to a Reuters report on June 28, four private equity firms Carlyle Group LP, Bain Capital, GTCR LLC and TGP Capital LP are vying for MoneyGram International. Currently, second round of bidding is in progress. The deal, if successful, may fetch $25-$27 per share, which represents a good upside from the current level.

Improvement in macroeconomic conditions will boost transaction volume and revenue

With an optimistic outlook for the developed economies in 2013-2014, money transfer will increase. Based on the US Census Bureau report to determine the trend in the employment of immigrants in the US, employment has increased in the last 12 months.

With the increase in the housing sector, the construction sector is poised for growth, which has a high number of immigrant employees. So, this will help the money transfer companies. I believe that MoneyGram is going to benefit from this. Also, according to the latest report on overall unemployment, the numbers have been on the decline. So, the boost in employment will help MoneyGram as more money transfer will occur.

New product initiatives will help boost volume and revenue

The company has been focusing on expanding its core services via new channels. MoneyGram online and bill pay transaction grew by 50% in the first quarter year-over-year. The new channel has shown an impressive growth of 31% year-over-year. I believe that the company’s focus on new channel growth and online service offering will gain traction from Xoom (NASDAQ: XOOM) and will help the company increase its revenue. We expect these initiatives will help the company increase its customer base and revenue.

The company has been entering into strategic collaboration to increase its global expansion

Recently, MoneyGram signed an agreement with two postal service providers in Africa. This will help the company improve its money transfers to the African countries. The company also entered into an agreement with Kotak Mahindra Bank in India to improve upon its money transfer services in India. The company has also planned to increase the number of its agents in these countries. These strategies will help the company increase its customer base, which will help it to grow its revenue.

Peer analysis

Western Union is the leading company in money transfer services. It has a market share of 15%. But its competitors like MoneyGram are rapidly making inroads in its customer base. Recently, the company has announced reduction in charges in a few corridors. This was to make its charges more competitive.

This will help the company reduce customer attrition, but will impact its bottom line which it believes can be compensated by large volume. The company has taken various initiatives to launch its online and mobile services.

Recently, it has launched bank-to-bank money transfer from US and UK to India. The company has also announced its new product cash to bank money transfer to India. It is expected that the company will expand these offerings in the other corridors in future. These initiatives are likely to create additional transaction volume.

Xoom is another peer in this field and provides online transaction facility. With the increased penetration of internet and mobile, online transactions have gained in market share in the money transfer services. Xoom’s revenue increased by 50% in the first quarter compared to the first quarter last year. With more product offerings and innovation, and rapid increase in online and mobile transaction, the company is expected to grow by 40%-50% in the coming year.

Ratio analysis

 

P/S ratio

Forward P/E

`PEG Ratio

MGI

0.97

15.61

1.35

WU

1.71

10.99

1.32

XOOM

10

N/A

N/A

Looking at the P/S ratio, MoneyGram share look undervalued when compared to its peers. The forward P/E ratio of Western Union looks cheaper. The PEG ratio for both MoneyGram and Western Union look comparable. As Xoom is expected to report negative profit for at least this year, with breakeven expected in 2014, the forward P/E ratio and PEG ratio is not applicable.

Conclusion

MoneyGram has taken various initiatives to expand its product offerings and reach new customers. The company has increased its agents in Africa and India to reach out to more customers. The company has also been investing in online and mobile services. With the expected growth in online transactions, it will help the company grow its customers and revenue. So, at this level the stock is a good buy.

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Lalit Kumar has no position in any stocks mentioned. The Motley Fool recommends Western Union. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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