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
Credit processors like MasterCard and Visa
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
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
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
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?
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