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Blackhawk Network Holdings (HAWK) made its public debut on April 19th. Shares of the prepaid payment company ended their first trading day with gains of 13.1% a $26.01 per share. On Monday, shares added another 0.7% return, currently exchanging hands at $26.20 per share.

The Public Offering

Blackhawk is a leading provider of prepaid payment technologies offering a broad range of gift cards and other prepaid services. The company offers gift cards from leading consumers including Amazon.com, iTunes, Lowe's and Starbucks, among others. The company also offers cards from payment networks including those of American Express, MasterCard and Visa.

Blackhawk sold 10.0 million shares for $23.00 a piece. Note that selling shareholder Safeway (SWY) offered all shares in this offering, as such the company will not see any of these proceeds. The public offering values the equity of the company at $1.19 billion.

The offering has been a success. The offer price was set above the high end of the preliminary $20-$22 price range set by the firm and its bankers. On top of that came the favorable price returns on the opening day on Friday.

Some 19% of the total shares outstanding were offered in the public offering. At Friday's closing price of $26.01, the firm is valued at $1.35 billion.

The major banks that brought the company public were Goldman Sachs, Bank of America/Merrill Lynch, Citigroup and Deutsche Bank, among others.

Valuation

Blackhawk Network is one of the largest third-party distributors of gift cards. With more than 500 content providers and 100,000 active retail distribution locations, the company processed $8.5 billion in load value in 2012, spread out over 216 million transactions. The company was entirely owned by Safeway which following the offering holds a 80% stake in the company. Shares of Safeway rose more than 2% in Monday's trading session following the successful offering.

The company's gifts cards are focused on grocery retailers, but can also be found in specialty retailers, home improvement retailers and clothing retailers.

For the year of 2012, Blackhawk generated annual revenues of $959.1 million, up 34.0% on the year. The company reported a net profit of $48.2 million for the year, up 32% on the year.

Blackhawk operates with $181.6 million in cash and equivalents, and has no debt outstanding for a comfortable net cash position. As such, the market values the firm's operating assets around $1.17 billion.

Based on this valuation, the market values the company at 1.2 times annual revenues and 25 times annual earnings.

Investment Thesis

As noted above, the public offering of Blackhawk Network has been a success. Shares were offered some 9.5% above the midpoint of the preliminary offering range, and are currently exchanging hands at $26 per share, trading some 23.8% above that level.

Crucial for the business going forward are the future developments regarding the number of transactions being processed, average load value and the commission which Blackhawk takes. The number of transactions processed increased by 17.4% on the past year while the average load increased by 4.4%. Total commissions on the cards came in at 9.3% of the load value, unchanged from the year before.

Just like many growth companies, Blackhawk relies on some key partners. Its top four distributors generate over a third of total revenues over the past year. On top of that comes the extreme seasonality of the business, Blackhawk generated 27% of annual revenues in December in 2012.

While revenue growth, earnings growth and a strong balance sheet all look fantastic, I am a little worried about the impact of intensifying competition on the size of the commissions, especially in the long term. For now the future looks still very bright, especially as the company is expanding into Brazil, Korea and even China.

Opportunistic investors who can stand some volatility could pick up some shares at these levels as current growth rates still look impressive and the valuation is in check.

Source: Blackhawk Network: More Upside After Its Successful Public Offering