The
future looked a lot brighter for Green Dot Corporation (GDOT) last week.
Every
week I calculate net present valuations (NPVs) for approximately two thousand
companies by performing a simple discounted cash flow based on consensus
analysis estimates. I then look for companies where the NPV has significantly
improved week over week. I believe these companies outperform on a short-term
basis.
Between
November 29th and December 6th, Green Dot’s NPV increased approximately 64%
from $24.27 to $39.81 per share.
Green
Dot shares closed on Friday at $22.91/ share, a 42% discount to the new NPV.
However, I am more interested in the fact that the valuation is increasing than
the actual trading discount. I expect that shares of Green Dot will outperform
the market in the next few weeks, but I do not want to give the impression that
they will suddenly leap to the new NPV.
The
Calculation
GDOT’s
valuation increase was driven by an increase in the consensus five-year
projected growth rate from 7% to 30%.
On
November 29th, the one-year estimated growth rate was 19.47%, the five-year
estimated growth rate was 7.00%, and beta was 0.8. Based on this I have
projected the following five year earnings per share
Year
1: 1.20
Year
2: 1.43
Year
3: 1.53
Year
4: 1.64
Year
5: 1.75
Based
on a market discount rate of 7.0%, a beta-adjusted discount rate of 5.63% was
selected for this stock. Assuming perpetual earnings equal to the fifth year
projection, the NPV was $24.72.
On
December 6th, the one-year estimated growth rate was 19.72%, the five-year
estimated growth rate was 30.00%, and beta was 0.82. Based on this I have
projected the following five year earnings per share
Year
1: 1.20
Year
2: 1.43
Year
3: 1.86
Year
4: 2.42
Year
5: 3.15
Based
on a market discount rate of 7.1%, a beta-adjusted discount rate of 5.83% was
selected for this stock. Assuming perpetual earnings equal to the fifth year
projection, the NPV was $39.81.
I
obtained the analyst growth estimates from Finviz. The market discount rate is
calculated weekly to optimize the distribution of valuation ratios across every
stock in the analysis.
The
Big Deal
Green
Dot Corporation sells reloadable, prepaid debit cards. The cards can be used
like Visa and Mastercard debit cards, but they are sold and can be reloaded
with cash at retail counters. Prepaid debit cards may not sound like a big
market, but Green Dot had approximately $550 million in revenue in 2012 and
sports a market capitalization of approximately $860 million. Green Dot’s
cards, particularly the MoneyPak product, are growing in popularity as they
offers a cheap, convenient, and anonymous way to make online payments using
cash. This is something both individuals without bank accounts and bitcoin
enthusiasts need.
The
big news for Green Dot is that they have received regulatory approval to
acquire the Wal-mart MoneyCard portfolio from GE Capital bank. The deal was
originally signed in June and is expected to be completed in the first quarter
of 2014.
Wal-mart
is a huge market for prepaid credit cards in part because they process a lot of
payments, but also because they use the cards to pay employees that have not
set up a direct deposit. Walmart has 1.4 million employees and about half of
them do not use direct deposit. It’s not hard to see why this deal is
convincing analysts to up their projections.
The
Play
I
believe GDOT is likely to outperform over the next few weeks.
Excitement
about the Wal-mart deal will wear off quickly, but Green Dot is on a roll this
year. I wouldn’t be surprised to see more deals announced and further upgrades.
Make sure to keep an eye on the NPV as it can be just as volatile as the share
price.
The
full set of valuations referenced in this article are available at
www.dcfhub.weebly.com.
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