Here's Why This Credit Services Company Is Set to Outperform

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I fully admit that I'm fascinated with the credit services sector as it is the one facet of the financial sector that appears nearly impervious to economic fluctuations. If what MasterCard's (NYSE: MA  ) CFO, Martina Hund-Mejean, noted is true, that 85% of worldwide transactions are still done in cash, then it would probably take a massive global downturn to put a dent in the credit services industry's growth.

Credit processors like MasterCard and Visa (NYSE: V  ) , which have no liability whatsoever since they are merely transaction facilitators, are logical choices to succeed domestically and in global markets. But a more intriguing play of late has been the emergence of prepaid debit cards, which totaled $65 billion in gross dollar volume in 2010.

The global meltdown a few years ago not only pulled the rug out from home prices, but it also destroyed the credit of millions of Americans who were laid off or had their mortgage reset and were subsequently unable to meet their debt obligations. With credit markets still very tight, consumers have been turning to prepaid cards to try to rebuild their credit. One such company that supplies prepaid debit cards that has caught my attention (that I also briefly mentioned last week) is Green Dot (Nasdaq: GDOT  ) . I'd like to go into a bit more detail as to why I think it's set to outperform.

Green Dot made two key acquisitions in 2011 that will significantly reduce its expenses. First, the company purchased Bonneville Bank in Utah, which allowed it to become a bank holding company. Now governed by the rules and regulations that encompass all banks, Green Dot should be able to offer a wider array of financial services. More importantly, Green Dot account holders are no longer bound to dealing solely with Synovus Financial (NYSE: SNV  ) and can make the switch to Green Dot Bank.

Keeping with the theme of vertical integration, Green Dot also purchased eCommLink, a credit card processor, last year. Although the company expects initial build-out costs to be significant, the addition of ECL should mean better margins, lower expenses, and the ability to be able to issue debit cards and process transactions completely in-house.

It's actually scary to realize that, according to management, Green Dot failed to hit its growth targets in the fourth quarter, yet it still grew total operating revenue by 26% and non-GAAP net income by 40%. The key driver of Green Dot's growth is what's known as gross dollar volume, which includes card activations, replenishes, and cash transfers. Green Dot ended the quarter with $3.8 billion in GDV, a $1.1 billion increase over the year-ago period.

Green Dot is also allying itself with consumer-staple-driven vendors. Prior to its IPO in 2010, its S-1 filing indicated that 63% of its revenue was derived from Wal-Mart (NYSE: WMT  ) . Even though Wal-Mart is a great company to collaborate with, I'm happy to say that Green Dot is also forging other strong partnerships with the pharmacy sector for its prepaid cards. All three major players -- CVS Caremark, Walgreen, and Rite Aid -- have Green Dot's prepaid cards available within their stores.

The last piece to Green Dot's puzzle of success is having enough capital to complete its vertical integration. Once again, investors can relax, because Green Dot ended the fiscal year with $201.5 million in net cash.

With Green Dot at just 12 times forward earnings and projected to grow at 24% annually over the next five years, I feel it has what it takes to be a significant outperformer in the credit services sector. With that said, I'm initiating a CAPScall of outperform on Green Dot to back up my claim. The question now is: Would you do the same?

Green Dot may not be the perfect stock for everyone, so I suggest getting your copy of our latest special report and find out what the smartest investors are buying. It's a free and invaluable source of information brought to you by our own Motley Fool analysts.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is loved by his credit card companies. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of MasterCard and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Visa and Wal-Mart, as well as creating a diagonal call position on Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that always pays its bills on time.

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