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Green Dot’s Acceleration Won’t End Soon

This week, Wal-Mart (WMT) announced that it has selected Green Dot Corporation (GDOT) as its banking partner.

Green Dot’s shares shot up nearly 25% on the news, closing at $23.41 on Wednesday.

More than 3.6 million shares traded hands, compared to the company’s 30-day average trading volume of about 295,000 shares.

The California-based company provides personal banking for the masses. It currently offers prepaid debit card products and prepaid card-reloading services throughout the United States.

Now, the venture will significantly increase Green Dot’s exposure to traditional retail banking services. And as you’ll see, that should be enough to drive shares higher going forward. Here’s why…

The New Type of Bank Account

The Wal-Mart/Green Dot partnership is largely aimed at under-banked customers who don’t currently participate with traditional banks due to low credit ratings and other financial problems.

So this partnership will greatly increase both companies’ ability to capture the millions of underserved retail banking customers.

The new checking accounts, called GoBank, will offer customers an FDIC-insured bank account with a debit MasterCard (MA) – without the myriad fees associated with traditional commercial banks.

For convenience, the accounts will give GoBank customers access to a network of 42,000 ATMs throughout the United States.

To open an account, Wal-Mart customers must first purchase a $2.95 starter kit, which includes a temporary debit card that customers can use until their personalized card is issued.

Once an account is opened, GoBank will impose an $8.95 monthly fee unless the customers consent to a monthly direct deposit of $500 or more.

And in a bid to win over this subset of underserved banking customers, GoBank will waive fees typically associated with traditional retail banking services – such as overdraft fees, ATM fees, and fees associated with failing to maintain a minimum balance.

The accounts are expected to be available in U.S. Wal-Mart stores by the end of October 2014.

Will Green Dot Reach Its Full Potential?

In Green Dot’s Q2 results, the company managed to grow its total operating revenues to $147 million, a 4.5% increase over its Q2 2013 results.

While that might not seem extraordinary, these numbers outpace the industry average of 0.1% growth, proving that Green Dot understands how to grow revenue in a relatively stodgy industry.

During the second quarter, Green Dot improved its earnings per share by 24% compared to its second quarter results from 2013.  And while it’s true that the company has experienced volatility in its earnings, the deal with Wal-Mart will significantly smooth its earnings per share over the long haul.

Current guidance is for Green Dot to report improved earnings of $1.41 for 2014, versus last year’s $0.77. But a successful rollout of the Wal-Mart plan could prove immediately accretive to 2014 earnings, pushing expectations even higher.

GDOT has virtually no debt, and the company maintains a quick ratio of 1.39, which illustrates its ability to avoid short-term cash problems.

When taken together, Green Dot’s solid financial footing – combined with the prospects of a meaningful distribution channel that serves 140 million customers in the United States on a weekly basis – means Green Dot should soon be raking in revenue.

This will solidify the company’s cash generation rate, and will translate into a much higher stock price – with a price target of $28 in the next 12 to 18 months.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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