Looking in the All-In-One screener for companies with no debt and 5-Star Predictability produces just a dozen companies--out of the many thousands followed by GuruFocus.
Jack Henry & Associates Inc. (JKHY, Financial) makes the cut. It has a strong, moat-like position in its sector, with much of its business secured by five-year or longer contracts. It is virtually embedded in most of the credit unions and small and mid-tier banks it serves, which gives it extra security.
This three-month price chart shows it has recently pulled back:
There is a good possibility the share price will resume the upward drive it has been on since 2009 however:
History
According to the company's website and yearly filing with the SEC, it opened in 1976, with Jack Henry writing the company’s original software package himself. By 1985, the company had grown enough to go public on the Nasdaq Exchange. That year, the company also got into the hardware business by remarketing IBM computers to its clients.
Six years later, in 1992, the company began aggressively acquiring companies to widen its base; that also got it into the outsourcing business. Other important acquisitions included the Financial Systems Division of BancTec Inc. in 1999, Symitar in 2000, CU Solutions, which brought in Cruise (now CruiseNet), in 2002 and ProfitStars in 2006. More recent acquisitions include Banno in 2014 and Bayside Business Solutions in 2015.
The company also has grown through internal development, dedicating what it calls "significant resources" to ongoing research and development. In fiscal 2016, it spent $81.2 million on research and development.
The company’s business
According to its annual SEC filing, Jack Henry & Associates is an outsourcing company, handling information processing services for smaller banks and for credit unions. Within banking, it targets institutions with up to $30 billion in assets; it targets all credit unions, regardless of size.
It provides two types of services:
- Core: basic banking functions, from an IT perspective, including deposit, loan and general ledger transaction software and keeping centralized customer and member information.
- Complementary solutions: includes “business intelligence and bank management, retail and business banking, internet banking and electronic payment services, risk management and protection and item and document imaging solutions.”
These core and complementary solutions are delivered through three brands:
- Jack Henry Banking: integrated data processing systems for more than 1,100 banks (as of year-end fiscal 2016) ranging in size from community banks to multibillion-dollar institutions with assets of up to $30 billion.
- Symitar: core data processing for credit unions of all sizes, with over 800 credit union customers.
- ProfitStars: develops and markets specialized products and services (complementary solutions) to financial institutions that are primarily not core customers. It serves nearly 10,200 domestic and international customers with these solutions.
Financial results come through two reportable segments: bank systems and services and credit union systems and services.
International sales have accounted for about 1% of sales in the past three fiscal years.
The range of outsourcing services is broken down in this slide, presented at the May 2016 Analyst Day:
Jack Henry & Associates has developed a successful line of business by specializing in an area of information technology in which smaller banks and credit unions would prefer not to direct too many resources. Within this niche, the company has several lines of business.
Revenue
In fiscal 2016, the company generated $1.354.6 billion in revenue.
This chart shows the growth of revenue over the past 10 years:
GuruFocus reports these average annual growth rates:
- Three years: 9.9%
- Five years: 9.0%
- 10 years: 9.9%
The company says the “majority of [its] revenue” comes from contracts with terms of five years or more, and support and service fees.
This excerpt from the income statement shows the sources of revenue:
Strong year-over-year growth rates go back a full decade. Much of that revenue is almost guaranteed with long-term contracts. Support and services brings in the most revenue.
Competition
In its annual filing, Jack Henry & Associates says competition is strong and is expected to remain strong. Over the past decade, there has been significant consolidation among providers of products and services in this market. The company also says that it sees few gaps in its lines of products and services. Consequently, it does not see acquisitions as a major strategy in its future. This suggests its competitors may increase their share of the market more quickly than it does.
Named competitors include for Jack Henry Banking and Symitar are Fidelity National Information Services Inc. (FIS, Financial), Fiserv Inc. (FISV, Financial) and DH Corp. Hoover’s reports the same competitors.
ProfitStars, Jack Henry says, competes with various vendors that offer niche solutions to financial services organizations and corporate entities.
It sees its competitive advantage as customer service and believes it has the infrastructure and strict standards to provide market-leading service levels. It actively monitors customer satisfaction and retention levels.
Moat
Morningstar describes Jack Henry & Associates as having a wide moat. Vuru notes, “JKHY has maintained substantial gross margins, suggesting that they have been able to set prices without consideration of the cost of goods sold.” They also show this visualization:
Companies that can embed themselves firmly into the operations of their customers have a strong competitive advantage because customers face potentially high costs and operational disruptions should they move to a new provider.
Growth
The company believes it can continue to grow, especially by cross-selling and upselling to existing customers. In addition, it cites information from the Federal Deposit Insurance Corp. listing more than 6,100 banks and saving institutions in its target range; currently it serves some 1,100, so it has room to grow within its target market.
The same holds for credit unions. It cites the Credit Union National Association as listing nearly 6,300 domestic credit unions; Symitar currently serves some 800 of them, so there is room to grow this brand.
ProfitStars currently supports nearly 10,200 institutions, all of which it can cross-sell and upsell. It sells to all sizes of banking institutions.
This slide from the Analyst Day presentation sums up its growth plans:
Jack Henry & Associates has grown over the past decade and has room to grow further while remaining within the industry. It has an articulated plan to maintain its growth.
Other
Jack Henry & Associates is incorporated in Delaware and headquartered in Monett, Missouri.
According to Reuters.com, management has a long history with the company. Executive Chairman of the Board John Prim previously served in senior management positions, including chief operating officer and CEO. He joined the company through an acquisition in 1995. President, CEO and Director David Foss joined the company in 1999 after arranging the sale of another company to Jack Henry. Chief Financial Officer and Treasurer Kevin Williams joined Jack Henry in 1998 after serving as a practicing CPA in a public accounting firm.
Ownership
Jack Henry & Associates is owned by four of the investment gurus followed by GuruFocus. Chuck Royce (Trades, Portfolio) has the largest position with 591,700 shares, representing a 0.76% ownership stake. Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have the second and third-largest positions.
It has a high level of institutional ownership for a mid-cap company:
Yahoo Finance provides this tabulation of the top insiders:
Wesley A. Brown is a former director, and the other top holders, as noted above, are company officers.
With a relatively small coterie of shorts, a high level of institutional investment and substantial management holdings, investors can have a reasonable degree of confidence about Jack Henry & Associates.
By the numbers
The current share price sits about 2% below the 52-week high. It has solid return on asset and return on earnings numbers. The company pays a modest dividend and it bought back nearly 3% of its outstanding shares in fiscal 2016.
Financial strength
Jack Henry earns very high ratings from the GuruFocus system:
It is, of course, debt free. It had carried some long-term debt from fiscal 2010 through fiscal 2015, but has cleaned up the balance sheet since then.
As noted, the company’s average annual growth over the past 10 years comes in close to 10%.
Earnings have grown; this chart shows EBITDA (earnings before interest, taxes, depreciation and amortization) over the past 10 years:
Free cash flow has also moved higher:
Operating margins are strong. Over the past 10 years, it has ranged from a minimum of 21.18 to a maximum of 27.03. It is currently right at the top of the range, but even its lowest would be the envy of many companies. The net margin reflects the same strength; over the same period, it has ranged between 13.83 and 18.85 and currently is at the top of the range.
Also worth noting is a Piotroski F-Score of 9 out of 9, which is as good as it gets. Its WACC (weighted average cost of capital) is 8.1%, while its ROIC (return on invested capital) is 28.1%.
The company is an all-round strong performer with no debt.
Valuations
Begin with Jack Henry’s 5-Star (out of five) rating for predictability, which means it has consistently increased its earnings over the past five years. GuruFocus shows that stocks with a 4- or 5-Star rating are highly likely to earn capital gains with lower than average risk. This also marks it as a high-quality stock, and increases the likelihood it will trade at a premium.
All the valuation metrics highlighted by GuruFocus come to the same conclusion: It is no bargain.
The current price-earnings (P/E) ratio comes in at 27.44, and a look at a chart of this metric over the past 10 years shows it near all-time highs:
The PEG (price-earnings divided by five-year average annual growth) sits at 2.34. A ratio of 0.99 or less indicates a stock is undervalued; a ratio of 1.0 to 1.99 indicates fair valuation; and a ratio above 2.0 indicates the stock is overvalued. So, 2.34 suggests overvaluation.
For the Wall Street analysts followed by Nasdaq.com, Jack Henry is overvalued; the 12-month consensus price target is $86, about 4% below the closing price on Jan. 26. The consensus recommendation is a clear hold:
For those who like some technical analysis, this chart shows five years of share prices (in green) with the 200-day simple moving average in red:
All indications are that Jack Henry & Associates is overvalued, although by how much is debateable. At the same time, the addition of the 200-day SMA suggests this is the norm and fair or undervaluation is not common.
Conclusions
Jack Henry & Associates is an expensive stock, but it carries a premium for a reason: it is a high-quality stock with no debt.
Buying this when it is a value stock will require patience since pullbacks happen infrequently.
As noted, the company has a wide moat, which should mean increasing earnings for at least a few (and probably more) years. It does pay a modest dividend for investors who buy and hold, but its attraction will be its power to generate capital gains from consistently robust earnings.
Disclosure: I do not own stock in any of the companies listed in this article, and I do not expect to buy any in the next 72 hours.
Start a free 7-day trial of Premium Membership to GuruFocus.
