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 dcfhub.weebly.com
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