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Jack Henry & Associates: Beware Multiple Contraction

Robert Honeywill profile picture
Robert Honeywill


  • Jack Henry has provided shareholders with variable returns over the past six years.
  • The variability in returns has been the result of considerable volatility in the share price from 2018 onwards.
  • The biggest danger to Jack Henry's share price and, consequently, shareholder returns is a contraction of its P/E multiple from present levels.
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Jack Henry: Investment Thesis

Based on Seeking Alpha Premium analysts' estimates, Jack Henry & Associates, Inc. (NASDAQ:JKHY) is projected to grow EPS by an average of 10.79% per year for the five years 2019 to 2024 (I start with 2019 to eliminate COVID-19 distortions). The 10.79% forward estimate compares to a 3.72% average yearly EPS growth rate for the three years ended 2019. Table 1 below shows EPS declined from $4.43 for 2017 to $3.66 for 2019, contributing to the low historical growth rate through end of 2019, and the higher growth rate reflected in analysts forward estimates. A better measure of Jack Henry's longer term EPS growth is the actual and projected average yearly EPS growth rate of 8.1%, based on EPS of $3.28 for 2016, and analysts' consensus estimate of $6.11 EPS for 2024. That's quite a good EPS growth rate, but it has to be questioned if it justifies a P/E ratio in the mid-thirties and higher. If multiples remain around the historical average of 35.0 (see Table 3 below), double-digit returns are possible from buying and holding through end of 2024. The company, as a business, appears to be performing well, the dividend is safe, and the balance sheet strong with no debt. But, there appears to be a real danger to the share price from potential multiple contraction, leading to negative returns. A detailed analysis follows.

Looking for share market mispricing of stocks

What I'm primarily looking for here are instances of share market mispricing of stocks due to distortions to many of the usual statistics used for screening stocks for buy/hold/sell decisions. The usual metrics do not work when the "E" in P/E is distorted by the impact of COVID-19. And if the P/E ratio is suspect, so too, then, is the PEG ratio similarly affected. I believe the answer is to

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This article was written by

Robert Honeywill profile picture
I am a retired accountant with a background in large mining projects, from feasibility to full-scale operation, large scale primary industry and food processing, commercialisation of university intellectual property, and consulting to small businesses, government departments and insolvency practitioners. I have gained a wealth of experience from having the extreme good fortune to work, in a cooperative environment, with so many people far more intelligent and smarter than me; from scientists and engineers with MBA qualifications, to University professors across a range of disciplines. Through the accident of mergers, acquisitions and dispositions, I held, at various times, financial controller positions within Utah International Inc, General Electric Inc, and BHP Billiton organizations. If I have a special skill, it is in methods of assessment of projects with long lives, where costs are front loaded and/or future revenues are subject to considerable degrees of uncertainty. In relation to stocks, I have a theory, using projections to calculate a present value per share is far less useful for a share buying decision, than using those same projections for calculating future value per share for determining potential exit value and rate of return.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.

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Comments (6)

diamondjimbob profile picture
Your "multiple contraction" concern also occurred to me during 2020. I've held JKHY for more than 20 years and felt that it was getting exceedingly expensive last year as the PE climbed above 40. I decided to set a limit order to sell a portion of my holdings if the stock ever hit $200. Bingo! Aug 18th at a PE of about 51, the order triggered. Call it luck. I did something similar with JKHY in December 2017 when I thought it was too rich and sold some at a PE of 35 and a price of $118. That was also the right choice for me at the time even though it continued to go higher afterwards.

For me, buying anything at astronomical PE ratios is nearly impossible, but astronomical PE ratios make the selling decision much easier.
Robert Honeywill profile picture
@diamondjimbob Thank you for your contribution to the discussion.
@Robert Honeywill, very interesting and thorough analysis. Makes me rethink my current limit order on JKHY. I particularly appreciate the “leaky equity bucket” insight. Thanks for the education.
Robert Honeywill profile picture
@eatonbiz You are very welcome, and thanks for the kind words.
WSLegend profile picture
What is their business?
Did I miss a summary of what they do?
Robert Honeywill profile picture
@WSLegend Thanks for the question. Here is a summary from their latest SEC 10-K filing -

Jack Henry & Associates, Inc. ("JHA") was founded in 1976 as a provider of core information processing solutions for banks. Today, the Company’s extensive array of products and services includes processing transactions, automating business processes, and managing information for nearly 8,700 financial institutions and diverse corporate entities.
JHA provides its products and services through three primary business brands:
•Jack Henry Banking is a leading provider of integrated data processing systems to approximately 1,000 banks ranging from community banks to multi-billion-dollar institutions with assets of up to $50 billion. The number of banks we serve has decreased in the last year due to acquisitions and mergers within the banking industry, which are discussed further under the heading "Industry Background" in this Item 1. Our banking solutions support both in-house and outsourced operating environments with three functionally distinct core processing platforms and more than 140 integrated complementary solutions.
•Symitar is a leading provider of core data processing solutions for credit unions of all sizes, with nearly 840 credit union customers. Symitar markets two functionally distinct core processing platforms and more than 100 integrated complementary solutions that support both in-house and outsourced operating environments.
•ProfitStars is a leading provider of highly specialized core agnostic products and services to financial institutions that are primarily not core customers of the Company. ProfitStars' more than 100 integrated complementary solutions offer highly specialized financial performance, imaging and payments processing, information security and risk management, retail delivery, and online and mobile solutions. ProfitStars’ products and services enhance the performance of traditional financial services organizations of all asset sizes and charters, and non-traditional diverse corporate entities with over 8,600 customers, including over 6,800 non-core customers.
Our products and services provide our customers solutions that can be tailored to support their unique growth, service, operational, and performance goals. Our solutions also enable financial institutions to offer the high-demand products and services required by their customers to compete more successfully, and to capitalize on evolving trends shaping the financial services industry.
We are committed to exceeding our customers’ service-related expectations. We measure and monitor customer satisfaction using formal annual surveys and online surveys initiated each day randomly by routine support requests. We believe the results of this extensive survey process confirm that our service consistently exceeds our customers’ expectations and generates excellent customer retention rates.
We also focus on establishing long-term customer relationships, continually expanding and strengthening those relationships with cross sales of additional products and services, earning new traditional and nontraditional clients, and ensuring each product offering is highly competitive.
The majority of our revenue is derived from support and services provided to our in-house customers that are typically on a one-year contract, outsourcing services for our hosted customers that are typically on a five-year or greater contract, and recurring electronic payment solutions that are also generally on a contract term of five years or greater. Less predictable software license fees, paid by customers implementing our software solutions in-house, and hardware sales, including all non-software products that we re-market in order to support our software systems, complement our primary revenue sources. Information regarding the classification of our business into four separate segments is set forth in Note 14 to the consolidated financial statements (see Item 8).
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