The popular investment website and weekly magazine Barron's recently recommended Jack Henry & Associates Inc. (JKHY, Financial) as a "safe bet to take advantage of the turmoil" surrounding the recent ongoing banking crisis in the U.S. I have looked at the stock in the past and considered it too pricey, but now that the price tag has come down somewhat, and with Barron's recommendation, I decided to take another look at Jack Henry.
About the company
Jack Henry provides essential enterprise software to run a bank or a credit union. It focuses on smaller banks with assets in the $500 million to $50 billion range. Jack Henry has seen its stock price drop by 28% since mid-February as the banking sector has suffered from market turmoil. However, Barron's believes that the company is a safer way to invest in banking industry, credit unions and retail banks as its core business is to provide software to run the bank.
The company has a large customer base with over 8,000 customers. It also has a high retention rate of over 90% and a low churn rate of less than 1%. The company has reinvested its cash flow in organic growth, new products and acquisitions, and has increased its free cash flow by 25% in the last year. Barron's goes on to opine that the fintech has been unfairly dragged down by its association with regional banks and its business is unlikely to be affected as its products are sticky, not dependent on deposits and a large portion of its revenues are recurring in nature and secured by long term contracts.
Valuation
The GF Value chart shows the stock is about 30% undervalued. Looking at the chart, we can observe that this is the largest discount offered by Mr. Market in the last five years. The GF Value is an intrinsic value estimate from GuruFocus that uses the stock's historical price multiples, past returns and estimates of future business performance.
The GF Score is another proprietary GuruFocus measure which looks a five composite ranks to compute an overall score for the stock. Jack Henry's GF Score is very high at 95, and the stock is strong in all metrics except for Momentum. The low momentum is a measure of price action, so it may actually be an advantage as it gives investors an opportunity to grab shares at a discount. I particularly like the strong growth and profitability ranks for the stock. GuruFocus backtesting has shown that stocks with high GF Scores tend to outperform those with low GF Scores.
Jack Henry has achieved a strong upwards trajectory of revenue, earnings and owner earning per share over the last decade.
Over the past 10 years, revenue has grown at an ~8% CAGR while earnings have grown at ~10.5% CAGR. These are very good growth numbers, but even so, the price-earnings ratio may be a little high at ~31.
The return on invested capital (ROIC) is consistently above the weighted cost of capital (WACC), showing solid accumulation of shareholder value.
A look at the balance sheet shows low debt and good amount of cash. There appears to be no issues here.
The company pays a rapidly growing dividend that currently yields ~1.4% on a forward basis.
Competition
Jack Henry’s major competitors in the U.S. include Fidelity Information Systems (FIS, Financial) and Fiserv (FISV, Financial), both of which are much larger than Jack Henry. However, Jack Henry, unlike its competitors, has built its business mostly organically and without big acquisitions. While its more acquisitive competitors must maintain multiple acquired platforms, Jack Henry’s product set is much more cohesive and interoperable. This has helped maintain high return on invested capital and offer a more integrated product offering to its customers as well as a highly predictable earnings stream to its shareholders.
| Ticker | Company | CurrentPrice | Market Cap($M) | GF Score | MomentumRank | ProfitabilityRank | GF ValueRank | GrowthRank | ValuationRank | QualityRank | FinancialStrength | PredictabilityRank | GF Valuation |
| JKHY | Jack Henry & Associates Inc | 148.61 | 10,847.15 | 91 | 2 | 10 | 9 | 10 | 4 | 10 | 7 | 4.5 | Modestly Undervalued |
| FISV | Fiserv Inc | 113.01 | 70,422.09 | 94 | 9 | 10 | 6 | 10 | 5 | 10 | 4 | 4.5 | Modestly Undervalued |
| FIS | Fidelity National Information Services Inc | 55.43 | 32,810.98 | 60 | 2 | 6 | 4 | 2 | 8 | 4 | 4 | 1 | Possible Value Trap |
Analyst estimates
Analyst consensus estimates compiled by Tipsrank are mostly "Hold," and the 12-month average price target is about 20% higher than the share price as of this writing.
Source: CIBC
Morningstar (MORN, Financial) analyst estimates also appear to agree. Morningstar gives a 4-star rating and a $174 fair value estimate to the stock. Morningstar also gives the company a wide moat rating and an exemplary rating for capital allocation.
My take
My overall impression is that Jack Henry is high quality, but although the stock price has come down from its previous lofty levels, it is still quite high.
Warren Buffett (Trades, Portfolio) once said in a letter to his shareholders, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” I think this company fits the bill of a wonderful company, but I am not convinced on the price. A price-earnings ratio of around 31 is not cheap any way you cut it. Jack Henry is a predictable operator which produces high returns and sells at a valuation that matches.
I understand that you have to pay up for quality, but I'd like to see more insider buys of the stock (one director has recently bought 1,000 shares, which is a positive) and hopefully a lower price. Jack Henry certainly will go on my watch list in case it drops further, but the market still seems to be a bit greedy on this stock for me personally, so I'd rather watch and wait for now.
