MoneyGram Double Dips

MoneyGram International (NYSE: MGI  ) reported its results for the first quarter after the market closed on Wednesday. It was a good report with the usual things like revenue increases and earnings increases. Read it for yourself because I want to talk more about the interesting business model rather than report the results.

MoneyGram is the result of a reverse spinoff. This wasn't in Joel Greenblatt's book, You Can Be a Stock Market Genius -- the fuel of my investing fire as of late, as some readers may recall -- but I think I survived the mental exercise of thinking through what a reverse spinoff is. Viad (NYSE: VVI  ) spun off MoneyGram in July 2004. But because MoneyGram was larger than Viad, MoneyGram reports Viad as a discontinued operation rather than the other way around. That wasn't so bad, I guess.

This seems to be another one of those situations Greenblatt considers ripe for being incorrectly valued. Viad is in the convention and travel services business. That's certainly out of my circle of competence. But Viad had these money transfer businesses that didn't really fit into the mix. Et voila, MoneyGram is on its own to compete against the likes of First Data's (NYSE: FDC  ) Western Union.

MoneyGram has a cool business model that one might call a "double dipper." First, it charges customers a fee to use its distribution network. Then, customers provide the money to be transferred, which goes into a holding account. The second dip comes from the short-term interest MoneyGram makes on the float before completing the transaction. This is exactly what American Express (NYSE: AXP  ) does with its travelers checks business. It makes money from the fees as well as the float. Two revenue streams are better than one.

The other great thing about businesses like these is that once the distribution network is in place, it is scalable. Transactions can be increased at each node or by adding nodes. Renewing the company's Wal-Mart (NYSE: WMT  ) agreement could increase volume at existing nodes, while prepaid debit cards, a new product that will be introduced, should be considered new nodes. Either way, increased volume is good because more transactions mean more fees and investment revenues across fixed costs that do not grow as fast.

The stock has retreated from a high near $23 to its $18.78 current price. I think MoneyGram deserves a harder look. Where to start? Greenblatt says to focus on management incentives: You can do just that via the Form 10. Have fun!

Fool contributor David Meier does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.