Jack henry assoc
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Jack Henry & Assoc. Analyst: Lauren Currie. Company Basics. Sector: Information Technology Industry: Business Software Jack Henry & Assoc. has been in business since 1976

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Jack Henry & Assoc.

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Jack henry assoc

Jack Henry & Assoc.

Analyst: Lauren Currie


Company basics

Company Basics

  • Sector: Information Technology

  • Industry: Business Software

  • Jack Henry & Assoc. has been in business since 1976

  • Core product: integrated computer systems providing data processing and management information for small and mid-size financial institutions

  • 2 primary customer groups:

    • Commercial banks (80% of revenues)

    • Credit unions (20% of revenues)


Company basics1

Company Basics

  • Other products & services:

    • Outsourcing services (24/7 support)

    • Supplemental software (100 products or services)

      • Internet banking

      • Document imaging

      • Customer-relationship management

  • 60% of firm’s revenue is recurring

    • Monthly fees from outsourcing (main source)

    • In-house software licensing fees

      • Support fees

      • Maintenance fees

  • Business strategy: To provide high-quality, value-added products and services


Industry information

Industry Information

  • Highly competitive industry

    • High level of outsourcing

    • 2 % decline in financial institutions as a result of consolidation –asset growth remains @ about 7-8%

  • Heavy regulation

    • Business software

    • Financial institutions

  • Rapid speed of technological changes

  • Industry as a whole does not have a reputation for providing the largest returns on shareholder capital


Jack henry s position within the industry

Jack Henry’s position within the industry

  • Industry leader – 2nd to Fiserv

  • Dominant provider of processing solutions to credit unions

  • High economic moat because high switching costs = less frequent changes by banks

  • Profit margins are greater than the industry average

  • ROE is slightly lower than the industry average

  • Asset turnover of .7 is higher than the industry average and = to Fiserv

  • ROA, & ROIC are greater than the industry average

  • JKHY seeks acquisitions to expand its portfolio of supplementary products


Lwf company rationale

LWF Company Rationale

  • Evidence of growing markets / market share

    • Credit union growth potential

    • Maintenance fees are linked to client’s assets

    • Economy is expected to grow, which leads to greater spending by financial institutions

  • High ROE, ROA, and profit margins

  • Strong financial condition

    • ROIC much higher than cost of capital

    • Healthy free cash flow & excess cash

    • No long-term debt & very little short-term debt

  • Understandable products

  • Diverse industry compared to LWF companies


Risks cautions

Risks & Cautions

  • Continued consolidation of financial institutions may decrease the customer base

  • Acquisitions may become harder to find and more expensive

  • The cyclical patterns of the economy influence the growth of the company

  • License fees are showing signs of shrinkage as a percent of revenue

  • Service revenues are increasing as a percent of sales (lower margins)

  • Company history of aggressive accounting

    • Bringing future expenses forward to make future earnings look better

    • Executive bonuses tied to net income increases of 20% in 2006

    • Officers & Directors own 15.8% of stock


Valuation

Valuation

  • Growth is expected to continue at 10-12%

  • Jack Henry’s fourth quarter results exceeded analysts expectations

  • Current price = $21.79 Current P/E = 22


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