charlie penicook and zuowei xu november 19, 2013
TRANSCRIPT
Agenda
Introduction Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation
The Jack Henry Associates
Founded by Jack Henry and Jerry Hall in 1976
A provider of information systems and services for more than 11,900 financial institutions and corporate entities
Listed in the NASDAQ on October 29, 1985
Industry: Business Software & Services
Source: Jack Henry Company Website
Current Holding Information
November 11, 1999: Purchased 200 shares at $36.00/share ($7,200 total investment)
2:1 Split twice in 2000 and 2001, which took the holding to 800 shares at $9 per share
January 15, 2007: Sold 400 shares at $22.53 for a realized gain of $5,412
November 18, 2013 Price: $56.71 Unrealized Gain: 530.11% ($19,084) Total Position Value: $22, 684 (5.08% of total
portfolio)
Source: Yahoo Finance
Macroeconomic Outlook
The Federal Reserve Bank can control the financial institutions by controlling the supply of money, raising/lowering the reserve requirement and through open market operations.
The incoming Chair, Janet Yellen, announced that the Fed would continue the current Quantitative Easing policy.
Federal Reserve
Bank
Banking Industry&
Credit Union
Business Software&
Service
Business Software & Service
Source: Hfs Research, 2013 market sizing data
The IT and business services outsourcing market is at 170 billion in 2012. And the banking process outsourcing services made up about 85 billion.
Industry Forces Analysis
Bargaining Power of Suppliers: LOW The company’ s technology and service is its
advantage, and the market for suppliers of hardware is competitive.
Bargaining Power of Buyers: LOW Clients are reluctant to change for high
switching cost Threat of New Entrants: LOW
Dodd- Frank makes it more difficult for new entrants
Economies of scale
Industry Forces Analysis
Threat of Substitutes: LOW Brand advantage, high switching cost
Rivalry among Competitors: HIGH Mature market and consolidation
Company Overview
A Provider of core information processing solutions for more than 11,300 financial institutions and corporate entities
Supports 1300 community banks around the country, about 1/5 of the banks in United States
Supports 760 credit unions, about 1/10 of the credit unions in United States.
Source: Jack Henry Company Website
Company Overview
Source: JKHY 2013 Shareholder Meeting
Small Banks
Credit Unions
Specialized Products and service for other financial institutions
Company Overview
Wide MoatHigh switching cost for core processing serviceFocus on small banks and credit unionsLong-term contract with clients to ensure the future revenue growthDebt-free, ready to make acquisitions
Source: JKHY 2013 Shareholder Meeting
SWOT Analysis
Strengths Weaknesses- Recurring revenue- Strong free cash flow for
repurchase and acquisitions.
- Relatively small size compared to rivals
Opportunities Threats- More banks tend to
outsource their data and processing system
- Growth through acquisition
- Banking Failure increases - Hard to find proven
acquisition target- Negative Macroeconomic
outlook
Strategy
Concentrate on information systems and services for small banks and credit unions
Develop the latest processing platform and advancing technologies
Maintain the high levels of customer satisfaction
Strategy change: A mobile strategy for online payments
Management Outlook
Positive 2012 Performance Reaches All-Time High Strong sales performances by all brands Continued strong profit margins Exceptionally high associate satisfaction ratings Exceptionally high customer satisfaction ratings
Concerns The improved economic situation made bank
move the processing system in-house
Source: JKHY Consolidated Shareholder Meeting
Recent News
JKHY Reports 2014 Q1 Earnings: November 5, 2013 9% increase in revenue, 11% increase in gross
profits, 17% increase in net income over the first quarter of fiscal 2013
American Airlines Federal Credit Union completes successful conversion to Symitar Core system: November 13 $5.6 billion in assets and operates as the 13rd
largest credit union in the United States Jack Henry& Associates announces iPad
Compatible Banking: November 14 The app supports traditional in-branch and online
transactionsSource: Yahoo Finance
Recent Financial Information
The company keeps rising dividend rate for
Source: JKHY 2013 Shareholder Meeting
Recent Financial Information
The company would pay $0.80 dividend per share at current dividend rate.
Source: JKHY 2013 Shareholder Meeting
Recent Financial Information
Source: JKHY 2013 Shareholder Meeting
The company would continue to repurchase their shares because the they believe the stock value is undervalued
Current Stock Information
Source: Capital IQ, Yahoo Finance
Metric Value
Current Stock Price $56.82
Trailing P/E26.68
Forward P/E 21.69
Dividend Yield 1.40%
Market Cap($ millions) $4.86 B
Discount Rate
Source: Yahoo Finance
Regression6-year (pre-Dodd Frank) beta of .89High ROE Low debt weightPaid-down debt
No business risk premiumFor demonstrational purposes
Decision Drivers
Strengths: Stable revenue
growth Long-term contracts Increasing Dividend
Paid down debt New Product
offerings
Concerns: Overvalued: Over
100% price growth LTM
Net Income growth of 13%
Recommendation
Valuation Summary: DCF: $ 36.01 Comps: $41.48
Recommendation: Sell 200 shares @
market price of $56.71 to realize gain of $9,542
Hold Remaining 200 shares.