Company Overview: Jack Henry & Associates, Inc. (NASDAQ: JKHY) is engaged in offering technology solutions, mainly for the financial services industry. JKHY is an S&P 500 company that serves nearly 8,700 clients nationwide through its three business brands, namely Jack Henry Banking, which serves multi-billion-dollar institutions, community banks, and several other financial institutions. Symitar that offers core data processing solutions. Lastly, ProfitStars, which provides specialized core agnostic products and services.
JKHY Details
JKHY Rides on Acquisition Synergies & Decent Liquidity Position: Jack Henry & Associates, Inc. (NASDAQ: JKHY) is engaged in offering technology solutions and payment processing services to community banks. The company has four reporting business segments, namely (1) Core, (2) Payments, (3) Complementary, and (4) Corporate and Other. The year 2020 was marked by robust performance undertaken by the company. Despite the challenges owing to the COVID-19 led pandemic, the company delivered robust solutions and service to its clients. Further, the company also delivered a disciplined approach to run the company successfully, thus positioning it to weather the COVID-19 impact. We note that JKHY recorded $1.697 billion revenues in FY20. Further, the company has generated ~86% recurring revenue, along with a strong balance sheet and no debt during the year. This augurs stability and flexibility to the company for continued investment in research and development.
It is worth noting that the company’s solid momentum across Core (34.3% of total FY20 revenues), Payments (35.2%) and Complementary segments (27.3%) are expected to continue, going forward. Additionally, the ever-rising demand for Jack Henry’s Banno Digital Platform is likely to benefit the company’s performance in the days ahead. Further, robust technology solutions, as well as core solutions, are expected to maintain momentum across the company’s core customer contracts. This, in turn, is expected to drive its core segment’s performance. The company’s payment segment is expected to benefit from strong debit and credit processing solutions. Moreover, the growing implementation of new card-processing solutions is favouring the segment.
The company remains on track to continue enhancing its digital platform with the buyout of long-time business partner Geezeo. This acquisition bought exciting growth opportunities in the company’s digital space and provided clients with personalized, fast, and smooth, digital banking solutions. It is worth noting that JKHY’s outsourcing and cloud services have acted as key catalysts in FY20. Also, the increasing migration rate of the customers to the company’s private cloud environment remains a potential tailwind.
Looking at the past performance, JKHY delivered a CAGR of ~7.4% in revenues over the period of FY18 to FY20. Total assets increased from $2,033 million at the end of FY18 to $2,428 million at the end of FY20. The company continued to enhance its shareholders’ value by declaring dividend of $1.66 per share in FY20, up from $1.36 in FY19.
(In millions except per share data)
Past Performance (Source: Company Reports)
2QFY21 Key Highlights: During the quarter, the company reported earnings of 94 cents per share, which remained almost flat year over year. Revenue during the quarter inched up 1% from the prior corresponding period and came in at $422.4 million. The company’s non-GAAP revenues went up ~2.4% year over year and stood at $420.2 million. The top-line was benefitted by strength across Core, Payments and Complementary segments in the reported quarter. Also, accelerating processing revenues positively impacted the top-line growth. The company produced revenues of $250.9 million from Services & Support, which went down 2% from pcp, owing to decrease in deconversion fee revenues. However, the company remained on track to see growth in data processing and hosting fees in 2QFY21.Revenues from Processing went up 5% on pcp and came in at $171.5 million. The growth can be assigned to increasing processing transaction volumes.
During the quarter, total operating expenses came in at $328.7 million, up 1% on pcp, mainly due to higher personnel costs and increasing expenses associated to JKHY’s card processing platform. Operating margin stood at 22% in 2QFY21, flat on a year-over-year basis.
Revenue Highlights (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders together form around 38.22% of the total shareholdings while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 11.98% and 7.76%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics & Decent Liquidity Position: The company ended the quarter, with cash balance of $147.8 million. The current and long-term debt stood at $266,000 at the quarter end, down from $295,000 at the end of 1QFY21. Trade receivables stood at $212.9 million in the reported quarter. Notably, the company had no borrowings as at December 31, 2020 and December 31, 2019. In 2QFY21, the company’s EBITDA margin stood at 33.1%, higher than the industry median of 17.5%, indicating higher profitability. In the same time span, net margin and operating margin of the company stood at 17% and 22.2%, higher than the industry median of 6% and 10.9%, respectively. During the quarter, ROE of the company stood at 4.7% as compared to the industry median of 2.9%. The current ratio of the company stood at 1.48x during 2QFY21, higher than 2QFY19 figure of 1.25x, depicting decent liquidity position. In 2QFY21, debt/equity ratio of the company was 0.00x as compared to the industry median of 0.49x.
Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group
Key Risks: The company’s financial performance can be impacted by increasing headcounts and personnel costs. This, in turn, may weigh on margin expansion, going forward. Additionally, COVID-19-led uncertainties prevailing in the market are likely to diminish JKHY’s performance in the coming days. Furthermore, sluggishness in the Corporate segment and declining services and support revenues remain an overhang. Also, rising expenses and stiff competition from peers add to the woes.
Outlook: For FY21, the company anticipates GAAP revenues to be in the range of $1.76 billion-$1.77 billion. Non-GAAP revenue is expected to be in the band of $1.73 billion and $1.74 billion. Further, the company raised the earnings per share outlook for FY21. It now expects EPS to be in the range of $3.85-$3.90, up from $3.75-$3.80 to $3.85-$3.90. Looking forward, the company continues to see robust demand for Jack Henry technology solutions in the markets they serve. Despite the pandemic-induced uncertainties, the company expects a robust sales pipeline in FY21 and beyond.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: Over the last three months, the stock went down by ~8.3%. The stock made a 52-week low and high of $123.64 and $200.98, respectively, and is currently trading below the average of its 52-weeks trading range. On the technical analysis front, the stock has a support level of ~$142.13 and a resistance level of ~$158.01. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight premium as compared to its peer average, considering its strong liquidity postion, acquisition synergies, regular dividend payment to shareholders, and strong sales pipeline. We have taken peers like Global Payments Inc (NYSE: GPN), Mastercard Inc (NYSE: MA), to name few. Considering the company’s track record of robust liquidity position, decent 2QFY21 performance, acquisition synergies, encouraging outlook and valuation, we give a “Buy” recommendation on the stock at the closing price of $145.64, down by 2.02% on 12 February 2021.
JKHY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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