Money transfer services are mostly used by foreign workers sending money home to their families or close relatives, so the stronger the global economy the more employed workers there are and the more money they make. This boosts Western Union, Euronet Worldwide, Inc. (NASDAQ:EEFT), and Moneygram’s top lines (and usually the bottom line) as more money is transferred back home, which means there is more money for them to take their small cut from.
Fundamentals
Moneygram saw its profit rise by 90% over the past 12 months, and that growth is expected to continue going forward. In the future analysts are expecting 13%-17% EPS growth as the strengthening global economy raises wages and employment and the money transfer market continues its rapid growth. Moneygram hasn’t been able to be consistently profitable yet since the recession, but that is expected to change in 2014. If Moneygram can be consistently profitable, even without being bought out, it would be a buy. It’s predicted forward PE is 14, but whether or not it can hit that target is up in the air.
Western Union has a PE (trailing 12 months) of 10 and is expected to grow its EPS at a 10%-12% rate over the next several years, which is in line with the growth of the overall money transfer market. Western Union has been consistently profitable and trades at a low valuation versus the market with a double digit growth rate, yet only a PE of 10. Not to mention that Western has a dividend yield of 3% with a low payout ratio of 27%, which means that Western could easily boost its dividend. I’m bullish on Western Union and think that they could either boost their dividend or buy out a smaller player.
Euronet Worldwide, Inc. (NASDAQ:EEFT) Worldwide has a ridiculously high PE of 81, but its forward PE is far more realistic at 13.9. With an expected EPS growth rate of 14%-15%, if it can hit its expected targets then this stock is fairly valued, or even slightly undervalued. Euronet Worldwide, Inc. (NASDAQ:EEFT) pays out no dividend, but with the industry growing quickly and profits normalizing one could be possible in the future.
Rational thinking and final thoughts
Always be cautious when a buyout rumor is in the air. If Moneygram is bought out for $25 a share then you would be a happy investor with a quick 25% return, but if the rumor turns out to be false the shares will fall and you will be sitting on a large loss. I would wait until the rumor pans out and only invest (with a small options play or speculative stake) in them if the rumor has more substantial evidence or if they aren’t bought out and trade at a lower level.
Out of these 3 companies Western Union is by far the best bet, as they are consistently profitable, the biggest player in the market, trade at the lowest valuation, pay out a nice 3% dividend and could boost that yield in the future. The market Western Union operates in is growing fast and has a lot of exposure to emerging markets with high growth rates. Be bullish on Western Union.
The article Profiting from Wall Street Rumors originally appeared on Fool.com.
Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Western Union. Callum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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