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Robert Abbott
Robert Abbott
Articles (863)  | Author's Website |

Jack Henry & Associates: A Low-Debt Tech Stock

Valuation may be a challenge, but this company offers robust financial strength and profitability

October 22, 2020 | About:

Fiscal 2020, which ended on June 30 for Jack Henry & Associates Inc. (NASDAQ:JKHY), was an exceptional year for the company, as its cumulative total return shot ahead to the front of its class:

Jack Henry cumulative total returns

Jack Henry specializes in providing technology services to credit unions and banks with assets of up to $50 billion (mainly community and mid-tier banks). Despite its focus, it does not have the market to itself; competitors include Fidelity National Information Services Inc (NYSE:FIS), Fiserv Inc (FSIV) and the privately-held Finastra.

Operations are divided into three segments (according to its 10-K for fiscal 2020) based on markets served:

  • Jack Henry Banking serves about 1,000 banks with "core information processing platforms and complementary products and services."
  • Symitar takes care of 840 credit unions of all sizes with "core information processing platforms and complementary products and services."
  • ProfitStars is a catch-all for customers outside its two main markets. It serves 8,600 financial services organizations of all asset sizes and other diverse corporate entities. It offers these entities growth opportunities, security, mitigation of operational risks and control of operating costs.

There is room yet to grow for Jack Henry, in my view. The company quoted the Federal Deposit Insurance Corporation (FDIC) as reporting there were 5,131 banks with assets of less than $50 billion at the end of 2019 (Jack Henry now serves roughly 1,000 of them). It also quoted the Credit Union National Association (CUNA) as reporting there were 5,340 credit unions (Jack Henry served 840 of them).

At the same time, the company and its competitors are chasing moving targets. The FDIC also reported that the number of banks had declined by 20% between 2014 and the end of 2019, mainly because of mergers and other consolidations. Similarly, CUNA reported that the number of credit unions declined by 16% over the same period, again mainly because of mergers.

At the same time, though, assets per institution were increasing, a logical result when banks and credit unions are merging. In fact, an interesting symmetry existed over those five years: the number of banks declined by a compounded rate of about 4% per year and at the same time, compounded assets per bank were increasing about 4% per year. Meanwhile, the number of credit unions declined at a 4% compound annual rate during that period, while compounded assets per credit union increased an average of 7% per year.

How do service companies grow in this environment? For Jack Henry, the answer was to augment with growth through strategic acquisitions. That meant trying to get banks and credit unions to switch from their legacy, in-house IT systems to one of its systems. This obviously is a competitive area and companies compete by providing the functionality, support and services needed by customers.

Once a bank or credit union becomes a client, the company tries to expand the relationship by cross-selling complementary products and services. Note, too, that once a company in this niche captures a new client, that client is unlikely to go elsewhere because its technology is inextricably tied into the client's technology, so switching is both costly and difficult.

Beyond banks and credit unions, Jack Henry tries to make sales of complementary products to financial institutions that do not use its core operating system.

Turning to acquisitions, it has what it calls a "disciplined" approach. Since the beginning of 2000, it has made 34 purchases, five of those in the past three years. In each case, the company was looking for products and services that would complement its existing suites, both to core and non-core clients. It also looks for opportunities to sell beyond its traditional markets in the financial services industry.

The acquisition strategy may be less important going forward. It reported in its recent 10-K, "After 44 years in business, we have very few gaps in our product line, so it is increasingly difficult to find proven products or services that would enable our clients and prospects to better optimize their business opportunities or solve specific operational issues."

Jack Henry actually has the resources to pursue either organic growth or growth through acquisitions. The GuruFocus system gives it 9 out of 10 ratings for both financial strength and profitability.

Financial strength

Jack Henry financial strength

One of the reasons Jack Henry has such a high rating for financial strength is the extremely low debt. It's true the five debt lines on the table do suggest there is some debt, but over the past few years, the company has alternated between no debt and almost no debt.

Both the Piotroski F-Score and Altman Z-Score are high, backing up the high rating. Note, too, that the return on invested capital (ROIC) is 14.8% while the weighted average cost of capital (WACC) is 3.54%, indicating value creation.


Jack Henry profitability

Again, it gets a high profitability rating, in this case due mainly to the robust double-digit operating and net margins. Still, the GuruFocus system warns the gross margin and the operating margin have declined. Here's a 10-year chart of the operating margin:

Jack Henry operating margin net margin chart

So, the operating margin has come down about 3% points over the past three years. Interestingly, it appears to have stopped the slide this year, when so many headwinds appeared. I would argue that the margins are still strong, despite the dip.

The growth metrics on the three final lines of the table are not as dramatic as the margins. However, they are positive, and it is good to see profits (Ebitda and earnings per share) growing at about the same rate as revenue.


Jack Henry GuruFocus Value chart

While the GuruFocus Value chart shows a fair valuation for the stock, the price-earnings ratio of 41.44 is well above the software industry median of 31.32 and its own 10-year median of 26.74.

The PEG ratio, which is calculated by dividing the price-earnings ratio by the five-year Ebitda growth rate, also indicates an overvalued stock. It stands at 8.04, where a ratio of 1.00 is considered fair value.

To put it all in perspective, let's look at a 10-year price chart:

Jack Henry 10 year price chart

The share price has jumped nearly six-fold over the past decade. What's more, it has grown quite consistently despite the many ups and downs in the broader market. That suggests investors have been confident in Jack Henry.

Dividend and share buybacks

Jack Henry dividend and share buybacks

This is not the kind of company you buy when you want immediate shareholder returns. The dividend yield is below the S&P 500 average. There is room for it to grow because the dividend payout ratio is only 43%.

The most impressive number in this table is the dividend growth rate, an average of 12% per year for the past three years. Projecting that forward, the yield will nearly double over the next five years, for investors who buy and hold (and if the growth rate continues at that velocity).

Thanks to a dividend increase from $0.40 to $0.43 in February, the forward dividend yield is slightly larger than the trailing twelve-month yield.

Don't expect much of a boost in earnings per share through share buybacks. The company is repurchasing some shares but not enough to really affect the earnings.


Gurus have had some interest in Jack Henry, but it has been inconsistent:

Jack Henry guru buys and sells

Seven gurus have positions in the company. The largest is that of Pioneer Investments (Trades, Portfolio); it added nearly 4% in the quarter ended June 30 to finish with 117,562 shares. That was good for a 0.15% stake in the company.

Jerome Dodson (Trades, Portfolio) of the Parnassus Fund held the second spot with 112,148 shares after a reduction of 2.24% in the recent quarter.

Chuck Royce (Trades, Portfolio) of Royce & Associates held 108,687 shares at the end of the quarter, a reduction of 11.78%.

The other gurus with smaller stakes were Lee Ainslie (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Ron Baron (Trades, Portfolio).


Jack Henry & Associates is a relatively small technology company with a market cap of $12.20 billion. Nevertheless, it is a successful player in its niche, competing effectively with larger rivals. It has robust financial strength and profitability and a consistently growing stock price.

Value investors may take a wait and watch position, looking for a better price, but that may be a long wait. Income investors will skip it; there are many other good dividend prospects. Growth investors may be most interested, given the steady progression of the share price over the past 10 years.

Disclosure: I do not own shares in any of the companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website

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