Description

Company Overview

International Money Express (Intermex) is a leading global remittance operator that facilitates the transfer of money primarily from the US and Canada to 20 Latin American Countries, 8 African Countries, the Philippines, and Vietnam.  With over 4.5 million customers, the company has expanded its footprint to include over 100,000 retail locations, mostly located in community-owned stores.  Intermex’s main remittance corridor is the US to Latin America with Mexico representing over 67% of the company’s overall revenues.

Investment Thesis

Intermex current share price does not accurately reflect the strength and quality of its expanding business model.  Through its extensive and growing North American agent network, expanding digital platform, the recent acquisition of La Nacional, and its current share repurchase program, Intermex’s earnings per share are expected to grow well beyond the industry’s 9% annualized growth target.

Industry Overview

Money remittance transfers money from one person to another, most often from one country to another.  The service is mostly used by immigrants and foreign workers to send money to family members living in their home country.  In 2023, it is estimated that over $860 billion was remitted worldwide with India, Mexico, China, the Philippines, and Pakistan being the top five recipients and representing 36% of global transactions.  According to the World Bank, global remittance is expected to grow steadily and breach $1.5 trillion by 2030.  Nearly 30% of global outbound remittances come from The United States.

Over the last decade, the cost of remittances has fallen steadily as technology and increased competition from fintech and money transfer operators have reduced costs worldwide.  Today, to send $200 globally costs around 5.7% or roughly $11.40.  Remittance costs vary greatly by geography and country with sub-Saharan Africa costing around 7.9% vs. India at 4.3%.  By 2030, the World Bank expects those costs to decline to an average of 4.3%.  For countries like India and Mexico, remittances can add 3-4% to their national GDP.  Even though these countries do not directly encourage their citizens to work in foreign countries and remit money back to their families, they have eased regulations making it easier and less costly for family members to receive money.  Remittances provide a source of foreign “investment,” economic growth, and non-governmental support to poorer communities to help meet basic needs.

In the past, remittances were both slow and costly.  They took place either through bank-to-bank wire transfers or by money transfer services like Western Union and MoneyGram with their combined network of over 1 million global retail locations.  With the rise of financial technology, remittances have become faster and cheaper.  However, to be successful, businesses need to know their customers, where they work, where they shop, while becoming a trusted member of the community.

Intermex’s Business Model

Intermex’s revenue is generated by charging a fixed fee for each transaction as well-as a spread on the foreign exchange to convert US dollars into the recipient’s currency.  The transaction fee is divided between the sending agent (located in the US), the paying agent (distributes the money to the recipient), and Intermex.  In general, the sending agent receives roughly 40% of the transaction fee with the paying agent and Intermex splitting the remainder.  The foreign exchange spread usually equates to roughly 75-120 basis points of the transaction amount.  With Ecuador, El Salvador, and Panama having adopted the US dollar as their country’s currency and Guatemala’s exchange rate currently being very stable, Mexico represents the majority of the current foreign exchange spread revenue.  Even though the majority of Intermex’s customers have a banking relationship, mostly community banks, and use a smartphone, 70% of the transactions take place in person.  The reason is that 90% of their customers receive their weekly paycheck either in cash or check with only a small portion currently getting paid through a debit card or direct deposit.  Most of Intermex’s remittance takes place on Friday afternoon or Saturday when one of their customers visits their remittance location at their local grocery store, convenience store, or bodegas.  The transaction is part of a weekly ritual where the customer comes to cash a check, buy groceries, and remit money to a family member.  With most of the weekly remittances taking place over a two-day period, speed, accuracy, and ease of execution is a major differentiator and a key reason why an agent favors one remittance service over another. 

Over the past few years, International Money Express invested a large amount of time and money in making its service fast, transparent, and customer focused.  Once a customer’s account is established, an agent can quickly access the account, either by a name search, an account number, or a loyalty card swipe.  This immediately populates all the details of the transaction except for the recipient, which is part of a drop-down menu, and the amount which is keyed in.  In total, the entire transaction to an established recipient takes less than 20 seconds from start to finish with most wires available within minutes of the transaction.  Besides paying their agents well, Intermex also sets up a dedicated phone line (Telewire Service) at many of their sending agent locations that connects the customer directly to a customer service agent located in each of their major remittance countries.  Even though this is more costly than their larger competitors who set up a single customer service department that covers multiple countries, feedback has shown this is another differentiating factor in International Money Express’ business model.

In addition to transferring money, Intermex also provides a number of financial products/services like bill payment, check cashing, money orders, payroll cards, and prepaid branded credit cards that expand its brand, build loyalty, and help serve the underbanked.  This is in addition to the loyalty program that offers fee discounts after achieving specific transaction goals.

The expense to set up and train a new agent is relatively small and IMXI is able to recover those costs within 3-5 months after the agent is up and running.  Intermex has been able to leverage its growing agent network by increasing transactions resulting in higher revenues while keeping its operating expenses in check.  Since 2018, when the company went public via a merger, revenue has increased 19% annually while salaries (which represent approximately 50% of operating expenses) grew at an annual rate of 10%.  In total, operating expenses have increased by just under 8% annually which means that the company’s profitability is improving as more agents are added to the system.  Intermex’s management goal is quite simple:  Keep adding new agents in the under-served communities, increase the number of transactions and future revenues, keep the spread between gross profits and operating expenses stable or improving, which, in turn, will make the company more profitable. 

Competition

The global money remittance industry is made up of global financial institutions (banks), a handful of large money transfer services providers (Western Union, MoneyGram, Remitly, and Euronet), and a number of small regional players (Wise, RIA, WorldRemit, PaySend, and Xoom).  Most of the companies mentioned above are financial/fintech companies that have a remittance operation.  

All remittance operators have a very similar business model but focus their operations differently.  Western Union and MoneyGram International blanket the country by putting their agents in established national supermarkets, banks, and retail chains like Walgreens, CVS, and Wal-Mart.  This business model is designed around a customer who executes 1-2 transactions a month, can drive to a location, is less focused on customer service and price, and feels more comfortable with a well-known brand.  Intermex’s approach focuses on targeting underserved neighborhoods by putting their agents in community-owned retail locations.  Members of the community will visit these stores 4-5 times per week. 

Intermex also competes with a number of fintech operators who do not have any physical location and transact business online or through a mobile app.  These digital operators can only make a transaction via an established bank account, a debit card, or a mobile wallet.  Many of these digital operators transfer the money within 1-2 days but can process it more quickly for an additional fee. 

Digital Platform

In most cases, moving from analog to digital creates better operating economics for the company and convenience for the customer.  That is not the case for Intermex, at least for now.  The majority of Intermex’s customers are underbanked and often receive their pay in cash or checks.  These customers do not have the ability to use a digital platform and require the service of a remittance agent to complete the transaction. 

Intermex has a digital platform that they have been rolling out to meet demand.  Even though 60% of Intermex’s customer base is between the ages of 18 and 34 and are technologically savvy, only about 30% of all transactions take place digitally.  This is actually higher than the 20% of aggregate digital remittances into Latin America as reported by the central banks of those countries.  Intermex has found that many of their customers are slow to adopt the digital platform, even after establishing a banking relationship, as they prefer to interact with an agent.  As long as the company’s remittance transaction happens speedily, there is not a driving force for their customer behavior to change.  Recently, money transfer services, like Western Union, have been focusing their time and money on quickly building and marketing their digital remittance platform so as to hit critical mass.  This distraction has allowed Intermex to continue to grow their in-person market share. 

The digital platform is the fastest growing segment within Intermex’s operation and the company fully expects that the digital platform will continue to grow quickly, especially as direct deposit, pay cards, and mobile wallets are a growing trend used to pay workers.  Many of Intermex’s digital customers were initially retail customers whose financial circumstances have changed allowing them to use their bank, a debit card, or a credit card to initiate a money transfer.  Being able to seamlessly transition their retail customer into a digital customer helps reduce Intermex’s customer acquisition cost.  The customers that transition to digital are expected to be more loyal and transact with the company for a longer period of time vs. those that came via a marketing campaign.  Currently, the profit margins of a digital customer are comparable to those of a retail customer but, over time, as more customers migrate to digital transactions, the profit margins are expected to improve.  In addition, buoyed by its recent acquisitions, management expects its digital platform to grow beyond the company’s current core Latin American corridor to include digital customers remitting from other countries like Spain, France, and Germany.

Valuation

Intermex has increased its revenue and net income by 20% and 30% per year respectively over the past 4 years.  In the past 15 months, Intermex’s earnings have been negatively impacted by inflation, a strong Mexican Peso, competitor discounting, and the integration of La Nacional.  Higher inflation has increased the cost of living for immigrants working in the United State, reducing the amount of money and or the number of times per month they are sending money back home.  The stronger Peso means that each US dollar conversion yields fewer Mexican Pesos, also impacting the frequency and amount of the remittance.  Competitors respond to the slowdown in remittance with a pre-scripted response of discounting their fees in order to boost transactions.  Finally, the merging of La Nacional’s system into Intermex’s platform has led to an increase in integration and restructuring expenses.  All of this is responsible for slower revenue and earnings growth.

Intermex’s management has seen this remittance slowdown in the past and is responding by lowering expenses and in some markets adjusting their pricing.  These are interim fixes as the company fully expects remittance volume to Mexico and other Latin American countries to recover over the next few quarters.  The acquisition of La Nacional has strengthened the company’s Latin American exposure while expanding its focus on the Dominican Republic, which is a growing and profitable remittance corridor.  La Nacional also gives Intermex a foothold in Europe with outbound remittances from Spain, Italy, and Germany to build upon.  The company fully expects that they will be able to convert a number of La Nacional customers into hybrid in-person/digital transactions.  They also believe that, over time, the average principal per transaction will increase to be on par with Intermex.

In the last 15 months, Intermex has also gone on the offensive by repurchasing roughly $90 million of its shares and has indicated that it will continue to purchase around $20 million per quarter if their share price remains undervalued.  Given the capital needs to grow and run their business are relatively low, management is signaling to the market that they would rather return money to their shareholders vs. acquire another company or throwing more money into marketing.

Repurchasing $80 million of their shares acts as a tailwind for EPS growth.  With the remittance market, especially the Latin American corridor, expected to recover over the next year, Intermex should be able to grow its earnings per share by over 18% per year over the next three years.  The company’s mid-point EPS guidance for 2024 is 1.85 which would generate an EPS over $3.00 three years out.  Applying a 15x multiple generates over $45/share price or over 100% gain from its current stock price.

Conclusion

Intermex operates in the remittance industry and competes with established players like Western Union and MoneyGram which are quickly transitioning to a digital landscape and new fintech players that offer remittance as part of their digital platform.  In-person remittance is a profitable and growing business for Intermex.  By expanding their retail locations into the communities where immigrants work and shop, the company has created brand loyalty and a network that is very difficult to replicate.  The speed at which the company is moving to digital remittance is dictated by their customer base.  Over time, Intermex fully expects that many of their retail customers will transition to digital as their financial circumstances change.

The current economic headwinds of inflation and a strong Mexican Peso are negatively impacting Intermex’s revenue growth and earnings in the short run.  The company believes that over the next few quarters, changes in inflation and workers’ pay will increase both remitting frequency and the payment per transaction as the overall market begins to recover.

The acquisition La Nacional will strengthen Intermex’s Latin American corridor with a specific focus on growing its Dominican Republic market share from 5% to 20%.  Integrating La Nacional will also increase its in-person retail remittance, expand its outbound remittance from the US, and gain an outbound foothold in Spain, Italy, and Germany.

Intermex’s share price is reflecting a slow-down in global remittances, especially the Mexico corridor.  Having built a platform that will grow faster than the overall remittance market, Intermex is seeing an opportunity to repurchase its shares at a discount to future growth and earnings.  Having bought back 15% of its shares and expected to repurchase another 12% in the upcoming year, Intermex’s EPS will have a nice tailwind as investors wait for the remittance industry growth to return.

Catalyst

• Increased outbound traffic from the US to Mexico
• The market remains unimpressed with Intermex shares giving management ample time to accumulate undervalued shares