Small Cap Buyout Candidate?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Call me a frustrated matchmaker, but where's the love for GreenDot (NYSE: GDOT)? Here is a company that operates in an underserved segment of the financial industry, and I keep seeing banks creating competitive products. You know that an industry is hot when American Express (NYSE: AXP) and people from Russell Simmons to Suze Orman launch their own pre-paid cards. I guess my question is, when will a financial institution wise up and just buy one of the top companies in this field?
GreenDot is growing like a weed and gets very little respect in the market. The company reported earnings in April showing an 18% increase in revenues and a 21% increase in EPS. When companies beat earnings you usually see a pop in the stock price, however GreenDot shares have shed about 20% since this earnings report. Here is a company that is now valued at just $748 million, and yet they have a huge network and huge growth potential. Behind the headline growth, the company is seeing a steady increase in activated cards, cash transfers, and gross dollar volume. To make this point further, consider that in the most recent quarter, GreenDot saw an increase of 14.82% in card revenue, cash transfer revenue was up over 27%, and gross dollar volume increased an adjusted 33% year-over-year. GreenDot sells for just 12.49 times 2012 expected earnings, and is expected to grow by over 24% in the next few years. By comparison, one of their main competitors, Netspend (NASDAQ: NTSP) sells for over 16 times earnings and is expected to grow by 21.25%. Since GreenDot is cheaper and is growing faster, it seems like an ideal buyout candidate.
Who could be potential acquirers? One candidate I would suggest is BB&T (NYSE: BBT). The company already has its own pre-paid card that is sold only through BB&T's web site and the bank's branches. This is an attractive market for large banks because there is no chance of overdraft, and the cards create fee income. BB&T is worth over $21 billion at current prices, and has over $42 billion of cash and securities held for sale, so either an all stock or all cash deal would work. This potential acquisition would also give the bank a chance to introduce its products and services to customers who otherwise might not consider having a bank account.
Another possible suitor I could see making a play for GreenDot would be Wal-Mart (NYSE: WMT). While the company would need to jump through some regulatory hoops to get the deal done, they already are a large shareholder in GreenDot. Since GreenDot is the exclusive provider of pre-paid cards to Wal-Mart, it seems like this would be a good fit. The card placement is already done, it would just be a question of what would regulators require.
Peter Lynch once said, sometimes he would get interested in a company as a takeover target, and then sell the shares because he got bored with waiting for the takeover to occur. GreenDot investors need to be patient. The company is calling for full year revenue growth of 20-24%, and EBITDA growth of 8-12%. With the stock selling for just over 12 times earnings, the stock seems very cheap considering GreenDot's strong competitive position. The company has no long-term debt, and generates significant free cash flow. You don't usually find top flight companies selling at a significant discount to their expected growth rate. Even if GreenDot doesn't get bought out, the shares look too cheap to ignore.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Express Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.