Description

Intermex is a money transfer business based in Miami. The industry has a bad reputation with the investor community due to the poor execution of Western Union and Moneygram, and fears around secular disruption. My variant view is that Intermex is a is a high-growth, wide-moat, niche consumer business with an excellent management team. This is not priced into the stock trading at 7x EV/NTM EBITDA (or 11x NTM EPS). The company grew revenue organically at a ~30% CAGR from 2013-2019, only slowing modestly to a ~25% CAGR in the latter half of this period, while expanding operating margins. Growth has remained strong despite tough comps this year – the business has grown revenue 18% YTD (and EPS 27%) after growing revenue 29% in 2021.

There is plenty of runway for Intermex to continue growing revenue DD and EPS >20% by simply continuing to execute its current playbook. IMXI started in Miami and built a stronghold in the surrounding 15 states, where it currently has ~30% share of outbound remittances to Mexico. These 15 states represent ~18% of the total market of US/Mexico remittances and IMXI is growing ~15% in these geographies. IMXI has launched in 10 additional "growth states," which represent 62% of the market (these states include CA and TX). IMXI has ~10% share in these states and is growing ~30% in these geographies (based on company disclosures).

The primary bear case here is that Intermex will get disrupted by digital money transfer providers. Based on numerous conversations with industry experts, I think it’s unlikely that digital-only players will materially impact the growth trajectory of Intermex for the foreseeable future (see variant view details below), i.e., outcomes for MTOs will be determined primarily by relative execution and industry-level remittance growth.

However, to the extent we want to hedge the risk of secular disruption, I’d suggest a short position in WU, which is trading at the same EV/NTM EBITDA multiple as IMXI with flat to shrinking revenue (whereas IMXI is growing high teens organically).

Company Description

Intermex is a money transfer company (“MTO”) focused on the U.S. to Latin American & Caribbean corridors. Intermex is the premier consumer brand among MTOs that operate in its corridors. The company has built this brand on strong product execution and best-in-class customer service for its agents and consumers. Intermex was founded in 1994 and sold to Lindsay Goldberg / Bessemer in 2006. In 2009, Bob Lisy, an MTO industry veteran, joined as CEO. The company was sold to PE fund Stella Point in 2017, and IPO’d in July 2018.

Remittance Industry Overview

Global C2C remittance volumes were ~$700bn in 2020 and are expected to grow MSD over the next 5 years. Roughly 80% of this $700bn is sent by immigrant workers to their country of origin. The industry is comprised of two sets of remittance providers that have limited customer overlap – banks, which capture ~2/3 of the industry, and MTOs (money transfer operators such as WU and IMXI), which capture the remaining 1/3. MTOs primarily target customers that 1) don’t have bank accounts; and/or 2) are relatively more price-sensitive, given the average MTO cost is roughly 50% lower than the average bank cost (MTO’s have average take rate of ~5% vs. ~10% for banks). Banks can charge higher fees because they have captive customers that typically remit money less frequently and are usually more focused on convenience than on price.

The MTO segment of the remittance industry is relatively consolidated because barriers to entry are high. WU has ~35% share; Ria (owned by EEFT) ~16%; MGI ~14%; IMXI ~4%. The remaining ~30% is captured by corridor specialists that typically operate on a local basis on both ends of a corridor (e.g., US to Mexico). Barriers to entry are high, particularly for multi-corridor operators, because:

• Bank relationships are necessary to effect transactions. This creates a chicken/egg problem – a bank won’t want to work with an MTO if it doesn’t generate sufficient volume to be worthwhile, but an MTO can’t get volume without bank relationships. Banks are also reticent to work with newer providers due to compliance risks. Based on our call with a longtime Ria/EEFT veteran, the most challenging aspect of building the business was securing relationships with banks.
• MTOs are two-sided networks – you need agents to get consumers, but you need consumers to get agents.
• There are different regulatory rules for each corridor, and the cost of compliance is high, both in terms of securing licenses with local regulators and implementing compliance requirements for each corridor. In many geographies including the US, MTO’s are held responsible for fraud perpetrated via their networks (this was a huge issue for MGI which was nearly bankrupted as a result).
• Brand is very important, based on our industry research. Customers of MTOs are generally not particularly price sensitive, caring more about brand/reliability/customer service than price. This is largely why WU has been around so long despite chronic underinvestment in its business – WU’s primary advantage vs. Moneygram or Ria is its brand. MTO customers, which are mostly low-income Immigrants, want to feel certain that their hard-earned money will be safely transported to its recipient, which is typically a family member that relies on these transfers for survival.

Market size & share

Intermex conducts >90% of its business in US to LatAm corridors.

• US outbound remittance volumes are ~$150bn annually, of which Intermex has ~10% market share
• US to LatAm remittances are ~$80bn, of which $30bn is the US to Mexico corridor and $10bn is the US to Guatemala corridor. These US to Mexico/Guataremala corridors are Intermex’s key markets – the company has 20%-25% market share here, up from ~10% in 2015.

Disaggregation of Revenue Growth

From 2016-2021, Intermex grew revenue at a 23% CAGR organically.  About 13% of this was driven by market share gains and the remaining 10% was driven by industry-level remittance volumes.

US to Mexico remittance volumes are driven by the following factors (see macro drivers in Appendix for full macro model):

• Housing starts and home renovations, which drive construction labor demand
• Construction labor demand drives construction wages, which drive workers to enter the construction sector
• US workforce participation, which influences the percentage of Immigrants as a percentage of the US construction workforce

The US construction workforce has been increasing 3%-4% annually over the past few years, driven by growing housing starts and renovations (see details below in investment thesis).

Meanwhile, construction wages have been increasing 3% annually (accelerating in 2021 to 5%), slightly faster than inflation due to labor shortages driven by a declining labor force participation rate in the US.

Finally, immigrants as a % of the US construction workforce have been increasing ~30bps annually to 25% of the workforce. as of 2019.

These factors explain why US to Mexico remittances have been growing ~10% annually over the past 5 years.

Management

• CEO/Chairman Bob Lisy joined in 2009. He was previously CMO/CRO at Vigo Remittance, which was acquired by WU. Prior to Vigo, he spent 7 years at WU.
  • Owns 5% of the company so is primarily incentivized by stock performance.
    • Owns 600k options with $9.91 exercise price
  • Cash bonus based on EBITDA growth.
  • Age 63
• CFO Andras Bended joined in 2020. He was previously CFO at publicly traded Computer Services Inc, which has been a great EPS compounder. Previously was a divisional CFO at GE.
  • Comp plan based on mix of EBTDA growth and gross margin improvement targets.
• COO Joseph Aguilar joined in 2019. Was previously COO at Sigue, a money transfer corridor specialist serving the US to Mexico corridor.

Variant View

Investors have been reluctant to look at this stock because the top 2 publicly traded names in the space, WU and MGI, have been disasters (particularly the latter, which was down 95% from its 2006 IPO price of $165 before being acquired by private equity this year for ~$11/share or ~8x NTM Street EBITDA). WU has been the most popular HF short in the payments space for many years now, and the Street has been pushing a secular bear case for the money transfer industry to support the WU short thesis.

Having been involved with WU for several years now (intermittently short), it’s become increasingly apparent that many investors have a misunderstanding of secular developments in the money transfer space (I was short WU despite this misunderstanding). Specifically, there is a Street narrative that older remittance businesses such as WU and MGI are being disrupted by “digital” remittance specialists such as Transferwise, Remitly, Xoom, etc. In fact, these digital players are primarily taking share from banks, which have historically represented ~70% of the remittance industry. MTOs primarily serve customers that do not have access to bank accounts or are sending money to a recipient that doesn’t have a bank account. The size of this market is growing (albeit ~LSD-MSD) and there is no evidence of change here or secular disruption, given that unbanked customers are not addressable for digital-only remittance providers. Price competition is increasing between banks and fintechs but is not notably changing among MTOs such as IMXI and WU. Overall reported take rates for traditional MTOs (such as WU) have declined modestly over the past 5 years, but this is primarily due to mix shift from fully cash transactions to digitally initiated transactions (that are received in cash), which are net accretive to gross margins (albeit potentially dilutive to operating margins given higher customer acquisition costs for digital-only customers) because the lack of send-agent fee more than offsets the lower take rate. Moreover, overall take rate declines for the large players such as WU have stabilized since 2018 (details below).

Negative sentiment is giving us an opportunity to buy this business at a bargain price – the stock is trading at 11x our NTM EPS, a ~27% discount to its historical average multiple of 15x. Even 15x would be a compelling price to pay for this business, in my opinion.

Investment Thesis

• There are a few possible catalysts for IMXI here, most involving M&A. However, even absent M&A, the business is growing organically at a rate that provides a >20% IRR without the stock re-rating from its current 7.0x EV/EBTIDA multiple (11x P/E):
  • WU acquires IMXI. WU has messaged that it intends do M&A in the money transfer space, and IMXI is probably the only company worth its time, other than MGI, which was just acquired by private equity.
  • EEFT (owner of 3^rd biggest MTO player, Ria) acquires IMXI. There would be significant operating synergies here. Even before synergies, with IMXI currently trading at 11x NTM EPS, the deal would be accretive to EEFT both in terms of pro forma organic growth and EPS.
  • The stock continues trading at 7x EBITDA or de-rates further and the company gets acquired by PE. No-growth competitor MGI was acquired at 8x Street NTM EBIDA earlier this year. The LBO math already works here with the stock at these levels. This is a company that has been owned by PE in the past (from 2006-2018 by Lindsay Goldberg and subsequently Stella Point) and is a scarce opportunity for PE these days – an asset consistently growing DD organically available for a single digits EV/EBITDA purchase price.
• There is plenty of runway for IMXI to continue growing revenue DD and EPS >20% by simply continuing to execute its current playbook. IMXI started in in Miami and built a stronghold in the surrounding 15 states, where it currently has ~30% share of outbound remittances to Mexico. These 15 states represent ~18% of the total market of US/Mexico remittances and IMXI is growing ~15% in these geographies. IMXI has launched in 10 additional "growth states," which represent 62% of the market (these states include CA and TX). IMXI has ~10% share in these states and is growing ~30% in these geographies (based on company disclosures).
  • Note that growth over the past 5-10 years has been roughly equally distributed across same store sales and agent growth, based on disclosures in the company’s S-1.
• The primary bear case here is that Intermex will get disrupted by digital money transfer providers. Based on numerous conversations with industry experts, I think it’s unlikely that digital-only players will materially impact the growth trajectory of Intermex for the foreseeable future (see variant view above), i.e., outcomes for MTOs will be determined primarily by relative execution and industry-level remittance growth. There are several ways in which IMXI has out-executed peers:
  • Top customer service/brand for LatAm remittances, which is key given that service quality is the most important criterion for customer selection (based on surveys). Based on independent surveys conducted by the Remittance Industry Observatory, Intermex has the top customer service ranking among remittance providers in LatAm corridors. Additionally, customers were polled on “important attributes” they look for in a money transfer provider. For “strongly agree that this is an important attribute,” 39% of respondents selected “customer service,” 36% “easy to use,” 28% “pricing transparency,” 22% “overall cost.” Intermex’s relative strength here is improving, based on our calls with industry experts, partially because WU service levels are deteriorating due to cost cuts and MGI has been forced by regulators to implement more stringent customer ID requirements.
    • Intermex’s corporate culture is extremely focused on customer service – company formers and competitors consistently emphasize this.
  • Agent selection and productivity: Intermex uses a rigorous diligence process to exclusively select high-quality money transfer agents that will produce high volumes of remittances. This is important because 1) there are fixed costs associated with each agent (e.g., compliance diligence and sales relationship); and 2) the quality of the agent impacts the consumer experience. On average, Intermex agents produce ~4.5x volume vs. the industry average (according to the company and directionally true based on our independent research).
  • Speed of POS transactions:  when conducting my initial industry research on WU, I was surprised to learn that money transfer transactions can take several minutes to execute because 1) Some MTOs such as WU have archaic POS systems; and 2) many agents are poorly trained. A key differentiator for Intermex is the speed of its transactions, which take ~50% less time than the average peer (according to the company and directionally supported by our research). This is particularly important in geographies that have busy stores where customers must wait in line to send money. This is more common than I would have guessed because most immigrants tend to send money around the same time (Friday afternoons after being paid).
  • Reliable payments network:  the company’s payments processing network has seen ~0.01% downtime over the past few years, which is significantly better than most peers based on our industry research. Network downtime for competitors has been a notable relative weakness that makes agents and consumers more inclined to switch to Intermex.
• The global remittance industry is growing MSD, faster than GDP growth as Western labor participation rates decline due to aging populations. US to LatAm remittances are growing ~10% as this issue is particularly acute in the US. This is a strong secular tailwind for Intermex, which conducts >90% of its business in US to LatAm corridors.
  • Growth in new housing starts is being spurred by record low home inventory, which is down ~30% vs. 2019 levels. Based on commentary from publicly traded homebuilders, a key constraint on new housing starts is labor shortage, which should continue to drive strong LatAm immigration trends. This trend is further supported by an aging US workforce. The US labor participation rate has declined from 67% in 2000 to 63% pre-pandemic and 62% currently. Immigrants currently comprise ~25% of the US construction workforce, and this percentage will likely continue to increase.

The below chart shows labor shortage rates relative to housing starts since 1996. The labor shortage rates are based on a survey of employers conducted by the National Association of Homebuilders. Labor shortages have been a key limiting factor in US homebuilding, which should continue to support wages in the sector and immigration for these jobs.

Key Risks / FAQs

• The MTO business model gets disrupted by a completely new money transfer system. When I first started studying the money transfer industry, I was surprised that transferring money cross border wasn’t as easy as sending money to a friend over Venmo. The primary issue here is regulatory compliance – most countries require that MTOs screen customers to prevent criminals from transferring money internationally. This is unlikely to change for the foreseeable future. However, it might be worth hedging this risk via a short position in WU.
• Digital disruption. The other big surprise for me when initially studying this industry is that ~30% of international remittances are still sent or received via cash transfer. The bear case on MTOs is that this will move to digital. I don’t think this is a serious risk to IMXI over the next 5-10 years for several reasons:
  • MTOs are the only money transfer service available to unbanked senders or recipients. Most immigrants in Intermex’s target markets do not have bank accounts and have no intention of getting back accounts. Even if the sender is an outlier with a bank account, the recipient rarely also has a bank account. There are several reasons for this: 1) MTO customers’ incomes are low to the extent that it’s not worthwhile for banks to do business with them; 2) MTO customers do not have US IDs and therefore cannot open bank accounts in the US; 3) in much of Mexico and Central America, there is a cultural aversion to the banking industry, and the majority of the population is unbanked by choice. I discovered this when researching a pawn business in Mexico called First Cash (ticker: FCFS).
  • The Street generally believes that digital transactions are fundamentally cheaper than cash-initiated transactions because digital transactions don’t incur agent costs (which eat up 30%-50% of MTO revenue, depending on the MTO). However, there are several important offsets to this absence of agent costs: 1) fraud rates are higher for digital transactions because it’s harder to verify the identity of the customer; 2) compliance systems are more difficult to implement without the customer physically being present to conduct the transaction; 3) digital transactions are typically sent from debit or credit cards, which incur fees ranging from ~1%-3% in the US.
  • Even if Intermex customers wanted to transition from cash to digital transactions, the company would have a significant advantage in winning its customers’ digital business due to its high level of customer loyalty / brand recognition. As a reminder, customer service and brand trust are more important criteria than price for most MTO customers.
• Risk of pricing compression due to competition. As described above, barriers to entry are high in the MTO industry, which is why the industry is so consolidated. Ria (owned by EEFT) has been fairly aggressive with pricing, which has caused some take rate compression for other large players, particularly WU. That said, prices seem to have largely stabilized lately. WU discloses pricing trends by geography, and we can see that pricing went from a ~100bps revenue growth headwind in 2016-2017 to neutral in 2018 to a tailwind in 2019-2020. Despite a more challenging pricing environment in 2016-2017, Intermex was able to grow revenue >30% annually. I don’t see any reason that pricing pressure should reemerge, and we could see pricing conditions improve if WU is able to acquire MGI.
• LatAm industry remittances volumes have been volatile. Secular trends in US home construction and labor force participation should sustain LatAm remittances, but there are factors that could cause short term fluctuations, such as US/Mexico exchange rates (when the dollar weakens vs. the peso, immigrants tend to delay remittances).
• Risk that competitors replicate Intermex’s competitive advantages. One of Intermex’s biggest advantages today is its brand, which would take years for a competitor to replicate. Moreover, WU and MGI have been focused on cutting costs, and we heard from WU formers in early 2020 that the company’s levels of customer service are the lowest they’ve been in many years. It seems unlikely that either of these will reverse course and suddenly start investing in their businesses at the expense of margins and near-term stock price performance.

Financial Estimates & Valuation

Base Case: I estimate a 2022-2025 organic revenue CAGR of 15%, a significant slowdown from 23% in 2016-2021. This revenue decel is due to my conservative assumption that LatAm remittance flows slow from ~10% growth from 2016-2021 to 5% from 2024-2026. This is based on the following underlying assumptions: construction labor wages grow 3% annually, immigrants as a % of the construction workforce increase from 25% currently to 27% in 2026, and the number of total construction workers increases ~1% annually. Meanwhile, IMXI share gains slow from 13% from 2016-2021 to 7%, on average, from 2023-2026. Note that there is updside to headline Street revenue estimates next year as the Street is not incorporating the acquisition of La Nacional, which will add ~15pts to revenue growth. My EPS estimates are significantly above Street, as the Street is assuming the business does not generate any material operating leverage or incremental EPS growth from capital allocation driven by the stock’s current ~10% FCF yield. The company has historically been levered (it was owned by PE prior to its 2018 IPO), and now that it has a clean balance sheet, management has clearly messaged their intent to buy back stock and do accretive M&A. The company acquired La Nacional in 4Q22 for $50m in cash (including the assets of LAN Holdings, which has not yet closed). The company has indicated this will add ~8pts to earnings growth, meaning that earnings will grow >20% in 2023 even if organic operating income growth slows to mid-teens (vs. >20% growth every year over the past decade). As such, there is likely material upside to Street estimates calling for 18% EPS growth in 2023 and 7% growth in 2024. I model ~30% EPS growth next year, assuming 15% organic revenue growth, 100bps margin expansion leading to ~20% organic EBIT growth; and 10pts from capital allocation (~8pts of this is already baked from the La Nacional acquisition, and the company is buying back stock). Beyond next year, this growth algorithm should remain broadly intact over the next few years with some variance depending on macro conditions and the price of share buybacks (with the stock currently trading at a ~10% FCF yield, the company can generate ~10bps of EPS growth simply by buying back stock).

Bull Case: The company continues expanding internationally and leverages its strong brand to cross-sell other financial services to its existing customers (e.g. short-term loans, insurance, etc.). The Street begins to recognize that this business is a long-term 20%+ EPS grower, and the stock re-rates to a PEG of ~1x. Revenue grows at a 20% CAGR from 2022-2025, EBITDA margins expand from 19% to 25%, EPS grows at a ~30% CAGR, and we get a stock worth ~$100 at 25x 2025E EPS of ~$4.00/share. This represents a 3-year IRR of ~60%.  

Bear Case: revenue growth slows significantly to a 10% CAGR from 2022-2025, EBITDA margins do not expand from 19%, the company squanders half of the FCF it generates (on the stock’s ~10% FCF yield), so EPS only grows at a 15% CAGR from 2021-2026. The Stock de-rates to ~10x P/E, giving us a 3-year IRR in the HSD. Put another way, I think permanent capital loss is unlikely with the stock at these levels. Another bear case scenario, arguably more likely, is that the stock continues trading at its current multiple or de-rates slightly, and gets acquired by WU, EEFT, or private equity. The stock is already cheap enough that the LBO math works (no-growth competitor MGI was just taken out at 8x Street NTM EBITDA), so I wouldn’t be surprised if there are PE funds already eyeing this asset.

Appendix: Macro Growth Drivers & industry-level US to Mexico Remittance estimates

Catalyst

Earnings beats / positive revisions - I model ~30% EPS growth in 2023 (vs. Street 18%) and ~25% growth in 2024 (vs. Street 4%).