Euronet Secures New Contract with Wal-Mart

Euronet’s stock bounced 27% off its February low, driven most significantly by a new contract with Wal-Mart, but also by the acquisition of HiFX and solid first-quarter results, particularly in the ETF segment. On this last point, firstquarter adjusted EBITDA of $43.6 million were in line with the Street, despite some onetime expenses, and cash EPS of $0.46 were $0.01 above consensus. Second-quarter cash EPS guidance of $0.57 were $0.02 above the Street, although we believe foreign currency provides a bit of a tailwind. Please refer to our March 18 note, “Raising Estimates on Acquisition of HiFX; Maintain Outperform Rating,” for our detailed thoughts on the HiFX acquisition. HiFX is a leading provider of online cross-border account-to-account money transfer services used by highnet- worth individuals and small and midsize businesses.

Euronet is paying roughly $242 million for HiFX. Assuming HiFX continues to grow adjusted EBITDA at the same 25% compound annual rate it has posted over the last three years, the forward multiple paid would be about 11 times. The deal is expected to close in the second quarter. Euronet has guided to $0.15 of cash EPS accretion in year one, which we believe is likely conservative. On the new Walmart-2-Walmart money-transfer service, which launched in late April, we have factored in roughly half a penny of incremental cash EPS in the second quarter, $0.04 in 2014, and $0.15 in 2015. We stress that these are best guesses as details remain thin, and we have elected to use estimates near the bottom end of the earnings framework provided below to be conservative.

Euronet has essentially no U.S.-to-U.S. business today, so the deal is completely incremental. Moreover, the company already spent money on customer service and compliance before the service went live, so we expect the business to have fairly high incremental margins. Despite some sharing of marketing expenses, management is still factoring in some slight accretion from the deal into its second-quarter guidance.