Jack Henry Associate (NASDAQ:JKHY) was founded in 1976, which is exactly the same year when apple was founded by Steve Jobs. And the founder of the company, Jack Henry and Jerry Hall are believed to have been the only two computer users in their state.
The company made its IPO in NASDAQ on October 29, 1985. And if you invest one dollar in the first IPO in 1985, you will get more than six hundred dollars now, which represents you will get about 30 percent increase of stock price for about 27 years.
I believe JKHY is a great target with a bright past and more brighter future. And everytime its stock price falls, it's a good opportunity to increase the investment in the stock. The company has huge potential to benefit from the wave of the Internet. What the company does is to transform the traditional banking industry into new Internet history.
The business software is a huge market and the market capital is about 180 billion and is predicted to be 200 in the next three years. The revenue of Jack Henry in 2012 is about 1.1 billion and it is relatively small in this market.
There are four characteristics in the business software industry.
First, it is becoming more and more popular to sell service instead of selling business software to customers. Service based business models are increasing their share instead of hardware. The clients prefer using JKHY's facility to restore their data to reduce costs. This adversely increases the switching cost for the clients. The revenue for service is become the dominant revenue.
Second, is online. Online transactions are growing fast by our software.
Third, is mobility. Nowadays, people tend to search the bank accounts by their Cellphones or iPad.
The last one, the business software has a great import for the traditional banking to help them save cost.
Jack Henry Banking sells the core processing systems and other service to almost 1,300 banks ranging from community banks to mid-tier banks up to 30 million. Symitar sells the core processing systems and other services to the 760 credit unions. ProfitStars® provides specialized products and services for about 11,000 financial institutions, which is not key clients.
The company has wide moat:
1.High switching cost for core processing service. The banks tend to outsource their service and store the data in JKHY facilities to reduce cost. This lead to a really high switching cost for the banks to change service providers. And recent replacement rates imply the average bank maintains its core processing systems for more than 30 years.
2.Jack Henry's focus on small banks and credit unions, which have few resources to build out their own systems. The company's small-bank focus is a plus because small banks are more likely to rely on one provider for all of their technology needs.
3.The company's contracts with the banks are most more than five years, or even longer to guarantee the future stable growth of revenue.
4.Last but not least, the company has no debt to the banks. The free cash flow is strong every year. And the company is ready to make acquisition when they find suitable target.
The future potential increase is very tempting.
Jack Henry continues to significantly outpace its large peers, and we think its small bank focus is a tailwind in the current environment. For instance, the company noted that electronic bill payment transactions increased 16% year over year. Although this is a relatively mature product of peers, we believe it has more legs for Jack Henry given that small banks tend to later adopters of new products. Jack Henry continues to see some scale benefits as it widens its service and support segment, and gross margins ticked up to 43% from 41% last year. This was the primary driver of the increase in operating margins, which rose to 26.2% from 24.9% last year, despite the falloff in higher-margin license sales. If you search the apps in your cellphone, you will find 27 apps made by Jack Henry for different banks.
The Internet is changing every traditional industry to adapt to the new era and customers with modern innovation way. Jack Henry is a bridge between the traditional banking industry and more fashionable and mobility industry in the future.