Jack Henry & Associates Inc (JKHY, Financial) closed at $156.94 per share as of August 29, 2023, marking a 1.1% decline from the previous day. Despite this, the company has seen a 6.09% gain over the last three months. With an Earnings Per Share (EPS) (EPS) of 5.02, the question remains: is the stock modestly undervalued? This article aims to provide an in-depth analysis of Jack Henry & Associates (JKHY)'s valuation and financial performance to answer this question.
Company Introduction
Jack Henry & Associates is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions. It primarily serves small and midsize banks, with nearly 1,000 banks and over 700 credit unions in its clientele. Despite the recent dip, the company's stock price remains below the GF Value of $201.42, suggesting that it may be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line indicates the fair value at which the stock should ideally trade. If the stock price is significantly above the GF Value Line, it is considered overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on this valuation method, Jack Henry & Associates (JKHY, Financial) appears to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Assessing Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, investors must review a company's financial strength before deciding to purchase shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Jack Henry & Associates has a cash-to-debt ratio of 0.05, which ranks worse than 95.34% of 2724 companies in the Software industry. Despite this, the overall financial strength of Jack Henry & Associates is 7 out of 10, indicating fair financial strength.
Profitability and Growth
Consistent profitability over the long term offers less risk for investors. Higher profit margins usually indicate a better investment compared to a company with lower profit margins. Jack Henry & Associates has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.10 billion and an EPS of $5.02. Its operating margin is 23.14%, which ranks better than 91.29% of 2722 companies in the Software industry. Overall, the profitability of Jack Henry & Associates is ranked 10 out of 10, indicating strong profitability.
Growth is one of the most important factors in the valuation of a company. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Jack Henry & Associates is 8.8%, which ranks better than 52.01% of 2390 companies in the Software industry. The 3-year average EBITDA growth is 9%, which ranks worse than 50.8% of 1994 companies in the Software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is a useful way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Jack Henry & Associates's ROIC was 15.59 while its WACC came in at 8.88.
Conclusion
In summary, Jack Henry & Associates (JKHY, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 50.8% of 1994 companies in the Software industry. To learn more about Jack Henry & Associates stock, you can check out its 30-Year Financials here.
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