Green Dot Is Already Up 30% In A Day, But Is It Worth Even More?

In a report published Tuesday, Compass Point analyst Michael Tarkan maintained a Neutral rating on Green Dot Corporation (NYSE: GDOT), while raising the price target from $18 to $22, after the company announced the renewal of the MoneyCard contract with Wal-Mart Stores, Inc. (NYSE: WMT) and a new share repurchase of $150M.

Green Dot announced an extension to its MoneyCard contract with Walmart, replacing the current contract that was set to expire at year-end. The new contract term is for five years (with a two year-extension) and is retroactively effective May 1, 2015.

Although Green Dot has not disclosed commission rates to be paid to Walmart, they indicated that commissions would be fixed through the duration of the contract.

The company stated that all things equal, if the new commission rates were to come into effect from the beginning of 2015, its adjusted EBITDA margins would be impacted by less than 200 bps. Expressing concern regarding the post-renewal margins, Tarkan said, "As a result, we estimate the product will be mildly profitable for Green Dot, but the margins are razor thin, leaving almost no cushion against either higher expenses and/or lower fees."

"A 200 bp negative impact to total company EBITDA margin would impact the MoneyCard-specific profitability by an estimated $15M, leaving just $9M of EBITDA remaining post-renewal, translating into a modest 4% margin. If pricing comes down or expenses move higher, it is easy to see how this program could quickly become unprofitable for Green Dot," the Compass Point report explained.

The management expects to utilize the board-authorized $150M buyback plan over a 3-year timeframe. Tarkan expects the regulatory approval to come through, since Green Dot has "$143M of unencumbered cash, ~$100M of excess capital at the bank, and is expected to generate $130-$140M of operating cash flow during 2015."

The EPS adjusted estimate for 2015 has been reduced from $1.45 to $1.40, while that for 2016 has been raised from $1.50 to $1.60, to reflect "the earlier implementation of new commission rates, offset by share repurchase activity."

Tarkan added further, "We view the renewal and buyback as clear positives, and shares remain relatively inexpensive, but post-renewal margins on the MoneyCard are razor thin, organic growth remains under pressure, and we remain concerned with management's lack of visibility into forward operating trends."