GreenDot Is Having a Half-Off Sale
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
GreenDot (NYSE: GDOT) is a small-cap company that many people don't know exists. If you've been in a Walmart, Walgreens, CVS, Kroger, Safeway or other stores, you've likely seen their card displays. Anytime you have a company that is highly profitable, leading their industry, and relatively unknown, it's a company to investigate further.
Who is GreenDot?
GreenDot is a "prepaid financial services company," according to Yahoo Finance. What this means in layman's terms is GreenDot sells a lot of prepaid cards, and they also sell a lot of their MoneyPaks. The company has a simple fee and usage plan:
You pay $5.95 per month for use of the card
You can avoid this fee by making 30 or more purchases or loading at least $1,000 onto the card
You can reload your card through direct deposit or through a retailer
Direct deposit reload is free; through a retailer it costs $4.95
You can get cash back when making a purchase, or use your card at thousands of ATMs for free
Through a MoneyPak you can transfer funds to PayPal, ADP, First Data and others
- Since the card is either Visa or MasterCard it can be used for bill payment if the company accepts credit cards
GreenDot has about 58,000 retail locations where you can purchase or reload your card. In comparison Bank of America has about 18,000 ATM locations. On average a GreenDot customer pays about $7 a month in fees; the average banked household pays about $18 a month in overdraft fees alone. GreenDot's distribution network covers 94% of America, and since the cards are labeled Visa and MasterCard they are accepted worldwide.
Why would I want to buy their stock?
Now that you know who GreenDot is, the question is why would you want to invest? Consider the following:
Current Price: $30.51
P/E based on '12 earnings: 15.65
Growth expected: 23.46%
Off 52-week high: -53.06% (thus the half off title!)
About 4 million active cards versus an addressable market of about 160 million – 2.5% penetration
Gross dollar volume growth from about $1 million in 2005 to over $10 million in 2010
Cash transfer growth from about $2.5 million in 2005 to over $25 million in 2010
If those numbers aren't enough to get you excited, here are some more facts. GreenDot makes money from card fees (42%), cash transfer fees (29%), and interchange revenue (29%). Their net income has been growing in almost perfect sequential order in the past four quarters. GreenDot also has no long-term debt and over $200 million in cash and cash equivalents. In addition, about 5% of their stock is owned by Wal-Mart (NYSE: WMT). GreenDot has a exclusive contract with Wal-Mart until 2015 (this is their third long-term contract). The 5% ownership Wal-Mart maintains gives both companies a good reason to make this partnership successful.
What's driving GreenDot's future growth?
GreenDot's MoneyPak is the growth driver behind the cards. Every MoneyPak carries a $4.95 fee and the MoneyPak is usable for amounts up to $500. Since the MoneyPak is how the customer transfers funds from the card, this service is going to be in high demand. In the future GreenDot plans to set up a separate bill payment system for their customers as well. The company also expects to be able to grow their margin by 100-200 basis points a year for the next few years. Last but not least, the turmoil in the banking industry in the last few years gives GreenDot an edge. If customers are upset with their bank and don't want to pay overdraft fees, GreenDot is a natural solution.
The only direct competitor to GreenDot is NetSpend (NASDAQ: NTSP). NetSpend is expected to grow at about 18% and sells at a forward P/E of 15.54 (about 28% more expensive then GreenDot). NetSpend does have good cash flow growth, but the difference is their balance sheets. NetSpend has about $58 million in long-term debt versus $0 for GreenDot. NetSpend also has about $65 million in cash versus about $200 million for GreenDot. One of the key factors is NetSpend does not have the exclusivity of Wal-Mart that GreenDot does.
GreenDot at fair value would sell at about $45 a share, about a 47% increase from current prices. So do some more research and decide if this GreenDot half-off sale is one you should take advantage of.
The Motley Fool has no positions in the stocks mentioned above. MHenage owns shares of Green Dot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.