Jack Henry & Associates (JKHY) is a uniquely positioned company that offers investors the opportunity to both accumulate wealth and generate income. It's a company I became familiar with several years ago while working for a community bank that converted to its flagship operating system. Today, the company's strengths can be seen in multiple areas that investors should take note of.
Jack Henry is one of the leading providers of core processing systems for domestic banks and credit unions. They process transactions, automate business processes, and manage information for more than 1,500 small to mid-sized banks and more than 750 credit unions. Another 9,600 customers use their ProfitStars program to improve revenue and growth, mitigate and control financial and operational risks, and contain operating costs. A component that I believe will continue to serve the company well as banking regulations and slow economic growth (loan growth) require the institutions they serve to continually get leaner and meaner.
The company tends to fly under the radar screen because it's not the biggest player in this space and only pays a dividend of 1.20%. Additionally, since it serves the "unloved" financial services industry, some question its future prospects for growth. However, if you can get past these surface layers, you'll see that it's multiyear contracts, nondiscretionary and recurring revenue make it a great way to gain exposure to the financial services industry without the risk that many of the companies they serve are faced with.
JKHY has maintained impressive double digit growth in multiple areas of its business. Dividend growth over one-, three-, and five-year periods is averaging 11%. EPS growth over one- and three-year periods average a pleasant 12%. ROA just below 10% for the last five years ROE at a steady 16% for the same period suggests they know how to maximize their resources and put their shareholder equity to work.
JKHY has also done a good job managing its debt levels. Their debt-to-equity ratio of 0.13 is below the industry average and the company maintains a quick ratio of 1.02 suggesting they could weather a short-term cash crunch. Taking it a step further, when you combine its low beta of 0.69 with a standard deviation that's just shy of 16, and a minuscule payout ratio that's below 25%, the ride toward wealth accumulation and future dividend increases should be smoother than some of its larger competition and broader markets. From a basic technical perspective, JKHY just crossed its 50-day moving average of 38.22 and looks poised to push higher, assuming the broader markets can hold their recent uptrend and this support level isn't pierced on fiscal cliff concerns.
Going forward, I agree with S&P's target price of $46 based on 2013 EPS estimates of $2.03 and $2.32 for 2014: a 20% premium from its current stock price of $38.64. Several factors support the company's past performance and future growth. Banks, credit unions, and financial institutions in general need to make every customer relationship more profitable than ever in order to offset the regulatory and compliance burdens they face. That means they need to find new revenue sources, contain costs, and automate their business lines to stay competitive -- a short list of things that lends itself nicely to JKHY ProfitStars program.
Whether Obama winning a second term is bad for banks or not is debatable. Nevertheless, based on his first term investors can assume the banking and financial services industry will remain under heavy scrutiny and in need of the kind of help a third party player like JKHY can provide.
One of the more appealing catalysts for future growth is the fact that their core systems are the lifeblood of bank and credit unions daily life. Since customers typically sign multiyear contracts and the sheer time and manpower needed to convert a system is so intensive, their business model functions like an annuity with long-term and costly surrender charges -- a fact that shows up in the company's 99% retention rate after conversion.
In summary, assuming that politicians can come to terms with the impending fiscal cliff and recessionary or bear market conditions remain at bay, Jack Henry is well positioned to grow, even if economic and jobs growth remains anemic. An important note: JKHY's ex-dividend date is rapidly approaching, so be conscious of your timing to pick up shares. The ex-dividend date is Thursday, Nov. 29, 2012.