Among the lower and middle classes, there’s always been a degree of mistrust of big financial institutions. And following the financial crisis, even more people began calling for bank CEOs heads to be placed on a pitchfork. Enter Green Dot Corporation (GDOT).
There are some 17 million unbanked customers in the United States, some 51 million underbanked, and a huge percentage of Americans who simply do not like their bank. There are many reasons for that dissatisfaction, but the primary complaint is lack of transparency regarding fees — even after Dodd-Frank. Minimum balance requirements are rising, as are overdraft fees, and bank hours just aren’t convenient.
That’s why alternative consumer finance companies appeared — things like check cashers, pawnbrokers, payday lenders, and Green Dot Corporation, which provides prepaid debit cards. Many people around the world like prepaid debit cards because they can load any amount of cash onto them, and then use the card wherever and whenever they use, because the card is accepted anywhere Visa (V) and MasterCard (MA) are accepted.
Believe it or not, people who don’t have credit cards feel like they gain a degree of status by carrying a card with one of the logos. Plus, many people don’t like to carry cash. They also don’t consider Green Dot to be a bank, even though the company has recently acquired GOBank, which allows customers to have a mobile-enabled checking account.
Green Dot is the biggest brand name in the industry, with some 80,000 locations from which people can distribute and reload the cards. There are roughly 4.5 million active cards generating more than 40 million cash transfers each year, and the company charges a fee for each load. The company is federally regulated and enjoys a good relationship with regulator and legislators, and the all-important yet too-powerful consumer advocates.
The bottom line is best expressed as the company’s mission to “reinvent personal banking for the masses.” This is the just the beginning, though — the company seeks to make acquisitions and move into other products.
The prepaid debit card has been a big hit. In 2005, the company had $34 million in revenue; four years later, that number jumped to $259 million. And revenues hit $546 million last year, showing that customer adoption has been gigantic.
The problem is that growth has been flagging a bit. Revenues are growing at around 3% while net income has fallen, as have gross dollar and purchase volume. The company did increase full-year earnings estimates to $1.10 – $1.20, up from $1.05 – $1.20. The stock rose on news that the company was rolling out its product into Dollar General (DG), Dollar Tree (DLTR), Home Depot (HD), and expanding its offering in Walmart (WMT) stores.
So there are several crosscurrents at work here, and it reminds me a bit of Outerwall (OUTR). OUTR’s coin-counting and Redbox machines are providing solid core cash growth, while its kiosk concept starts pushing out new products. I think Green Dot is analogous, and there is great demand for alternative financial products.
Here’s the kicker: The company also has half its market cap in cash – about $13 per share — with no debt. That means the company, which is trading at $23 as of this writing, is effectively trading at $10 per share, or around 9x estimates. For this, you are buying a core cash flow business whose flagship product seems to have stalled in growth. And cash flow has even improved — to about $90 million in the TTM or $2.40 per share.
So if you think as I do, that new products will drive the company’s revenues going forward, Green Dot looks like a good, cheap buy.
Lawrence Meyers owns shares of Dollar Tree.