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Don't Count Green Dot Out Just Yet

Adam Rust's picture

Posted October 12, 2012

Yesterday I tweeted out my view that Green Dot shares are being punished by an overreaction to the power of the relationship between Wal-Mart and Green Dot.

Well, I have had twenty-four hours to think about what I said, and I still feel that people are wrong about this company.

I understand that Green Dot is going to lose some business from Amex's Bluebird card, but everyone should be

able to see that it still has plenty of other ways to make money. Green Dot is not just a program manager. Green Dot also has a bank (purchased for $16 million) and a reloading network. Its diversity makes it different than almost any other player in prepaid.

Today, Green Dot's market capitalization is just $356.4 million, even though it has plenty of solid assets.  Imagine that someone wanted to take Green Dot apart to sell its parts. It would be easy to extract more than $5 a share immediately. Green Dot has $123 million in cash and $73 million in short-term investments. It also has another $54 million in receivables. This means the entire Green Dot business is selling for about $4.50 per share plus the cost of taking on its debt.

By the way, some of that debt is a "good." Green Dot has $33 million in deposits held on behalf of their cardholders.

Green Dot has a very diverse business. While some have said that the new non-exclusive relationships with its vendors will compress prices and potentially reduce load sales, Green Dot still has a healthy flow of revenue just from the transactions made on its cards. In 2011, Green Dot received $141 million from its share of interchange. Now that its cards are issued by its Green Dot Bank subsidiary, that number will certainly grow even the number of Green Dot cards shrinks. This seems like a certainty if only because of the fast growth in consumer uptake of the prepaid debit card. Green Dot's transactional volume soared 55 percent in 2011 alone. It would be hard to imagine that any wind could buffet all of that momentum.

  • Selected data from Assets: Cash: $123.1 million. Short Term Investments: $73.1 million. Receivables: $54 million. Other current Assets: $58.2
  • Selected data from liabilities: Long-Term Debt: $0. Current Liabilities: $126 million. More than $32 million of these liabilities are deposits.

Now let's look at income. Last year, Green Dot had operating income of $83.4 million and after-tax income of $52.08 million. Last quarter their net dropped to $9.97 million after three previous quarters where they recorded more than $13 million. Even if the company is re-valued to that figure times four, then Green Dot is producing $1.11 per share in income. Still, analysts estimate that 2013 earnings will be $1.35.

In all, this puts the P/E for Green Dot at just 7.4 times earnings.

By contrast, consider how the market seems to adopt a much more forgiving approach to NetSpend's business. NetSpend's shares trade for about ten dollars - almost the exact same as those of Green Dot - but each only brings an investor 25 cents per share. Green Dot's shares went down because their position in Wal-Mart was suddenly challenged. NetSpend cards are not even available in Wal-Mart. NetSpend has just $31.1 million in cash on hand. Green Dot has $196 million in cash or cash equivalents. NetSpend has a P/E of 39.37. Imagine that Green Dot has a horrible year, hemorrhages $100 million in cash and sees it earnings drop by 50 percent. It would still hav more cash and more earnings per share than NetSpend.

I am always amazed by the latent goodwill that others are willing to give to Amex. Almost every business story has praised Amex for their new card. Some of the press talks about the benefits that a low-fee high service card will bring to the unbanked. None of the press seems to question that long-term viability of a high-service card that has to hire so many outside vendors to provide those services.

My friend the institutional investor had this to say about the deal:

"How does anyone make money on this product?  Offering services like remote deposit, mobile bill pay, and checking all cost money to provide. The technology has to be licensed form 3rd parties. It must be a conscientious decision to gain share within this segment by AMEX.  Frankly, I think this program only last as long as AMEX is willing to fund it."

He's also skeptical that AMEX will be able to avoid the wrath of consumer advocates given that deposits to their cards are still FDIC-insured.

I could not agree more. For Amex, the Bluebird Card is a detriment to income. No one seems to wonder how long they will be willing to support a loss leader like Bluebird.