It Isn’t Easy Being Green Dot

The Dow Jones index is up nearly 9 percent since the beginning of the year. The broader-based S&P 500 index is up an even more impressive 13 percent. Not bad for a full-year return and it’s only April.

Unfortunately not every stock has been participating in this market rally. Take Green Dot for example.

Green Dot is the largest provider of prepaid Visa and Mastercard cards in the US. However, shares in GDOT have fallen nearly 15 percent since the beginning of 2012. So should investors be buying Green Dot at these levels or has the stock only begun its descent?

From a value perspective Green Dot doesn’t appear to be overvalued. In fact, their stock trades at a very reasonable future P/E multiple of only 12x. When you compare that to Wall Street’s earnings growth expectations it looks even better. Analysts are pegging earnings to climb 19 percent this year and for the earnings growth rate to accelerate to 24 percent in 2013. That gives Green Dot a PEG ratio of only 0.5. That’s cheaper than Apple (at 0.7).

A quick look at Green Dot’s balance sheet also checks out just fine. The company now has $244M in cash and only $42M in debt on their balance sheet. That nets to $5.68 per share in cash or approximately 21 percent of their current market value.

OK, so Green Dot passes on a cursory look at valuation metrics, but how about the fundamentals of the business?

This is where it starts to get ugly. Green Dot has reported three consecutive quarters of disappointing earnings results. That will kill a stock! Wall Street hates uncertainty, but it hates being disappointed even more.

In their most recent quarter, Green Dot just barely avoided posting the dreaded the “triple miss”.

  • Revenues – reported disappointing revenues of $123M (below consensus estimates of $129M)
  • Earnings – reported inline EPS of $.40
  • Guidance – both revenue and earnings forecasts for 2012 were below Wall Street’s consensus estimates

After three straight quarters of disappointing results, it’s hard for investors to have much confidence in these forecasts either. However the company could be sandbagging going into 2012 knowing that they need to beat the Street’s estimates to regain some credibility.

A bigger concern for investors maybe the business model itself. Demand for prepaid credit cards has exploded over the past few years and Green Dot has done a great job of positioning itself to take advantage of that trend. It now has distribution agreements in place with major retailers like Walmart, Walgreens and Kroger’s. These distribution partnerships allow Green Dot to sell their cards in 59,000 locations around the country.

Of course not all distribution partners are created equal and in Green Dot’s case Walmart has historically been their key partner. Since 2006, Green Dot has been the sole provider of prepaid credit cards for Walmart. That has resulted in Walmart being GDOT’s largest client by far. In 2011, 61 percent of total revenue was generated from Walmart.

Their current agreement with Walmart is set to run through May 2015, so there’s no worry about losing their main client in the near term. However, beginning in May 2013 the commission rates that Green Dot pays to Walmart is set to increase. This change will likely negatively impact Green Dot’s margins and may not be fully accounted for in consensus 2013 estimates.

Given the company’s rough track record of late and the potential for higher commission payments to Walmart beginning next year, it’s difficult to embrace Green Dot as an investment right now.

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