Jack Henry & Associates, INC.
(JKHY)
RCMP Presentation
(Existing Company Analysis)
19th March 2015
Prateek Baveja
Neha Saoji
Siyu Xu
Agenda
Introduction
3
Company Review
7
Macroeconomic Conditions
14
Industry Prospects
15
Stock Market Review
18
Financial Analysis & Projections
19
Valuations
22
Recommendation
27
2
Jack Henry & Associates – An Introduction
History
Industry
Founded by
Jack Henry
& Jenry Hill
in 1976
Business
Software &
Services
Headquarter
ed in
Monett,
Missouri
Serves
commercial
banks &
credit unions
Processing
transactions
Intro
Company
Automating business
processes
Macro
Industry
Stock
Managing
information
Financials
Valuations
Recomm
3
Jack Henry & Associates – Major Product Line
Intro
Company
JKHY Shareholder Meeting – Nov’2014
Macro
Industry
Stock
Financials
Valuations
Recomm
4
Support & Services form major chunk of revenues
Support &
Services
Hardware
Sales
License
Intro
JKHY 10K Pages 20-21
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
5
Change in Business Model
Intro
Company
JKHY Shareholder’s Meeting’2014
Macro
Industry
Stock
Financials
Valuations
Recomm
6
Current Holding

Current share price = $68.89

Current holding value = $13,563 (200 Shares)

Constitutes 7.39% of invested holdings (without cash)

Constitutes 3.18% of invested holdings (with cash)
4.35%


ABBV
Initial investment: $7,200
ABT
13.05%
AEO
14.13%
Unrealized gain: $11,736
AL
10.29%
COF
12.72%
JKHY
NHC
13.99%
SNA
7.87%
UNP
8.24%
WBA
ZIXI
3.53%
7.39% 4.45%
Intro
Company
Source: Yahoo! Finance RCMP Portfolio
Macro
Industry
Stock
Financials
Valuations
Recomm
7
History of JKHY transactions
Nov 11,
1999
• Purchase
• 200 shares @ $36
March 2,
2000
• 2 for 1 split
• 400 shares @ $18
Mar 4,
2001
• 2 for 1 split
• 800 shares @ $9
Jan 15,
2007
• Sold
• 400 shares @ $22.53 (realized gain of $5,412)
Nov 25,
2013
• Sold
• 200 shares @ $56.75 (realized gain of $9,550)
Dec 4,
2014
Intro
• Hold
• 200 shares @ $61.90
Company
Source: Yahoo! Finance RCMP Portfolio
Macro
Industry
Stock
Financials
Valuations
Recomm
8
Recent news at a Glance
BCB Community Bancorp Selects Jack Henry Banking to enhance
efficiency & Workflow Management
CUBG, nation’s largest Business Services Credit Union
Organization announces alliance with ProfitStars division
Oppenheimer upgrades JKHY from Perform to Outperform
Shruti Miyashiro, President & CEO of Orange Country Credit
Union, appointed to the board as an independent director
ProfitStars' iPay Solutions first to implement NACHA's Bill
Payment Exception Program
Intro
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
9
Management Team
Jack Prim
Chairman of the Board and Chief Executive Officer
• CEO since 2004, Chairman of the Board since 2012
• 38-year financial industrial experiences
• Expertise across departments from outsourcing
management, system implementation & support
David Foss
President
Intro
JKHY Website
Company
Mark Forbis
VP & CTO
Kevin Williams
CFO & Treasurer
Macro
Industry
Stock
Financials
Valuations
Recomm
10
JKHY is among the best places to Work
Intro
Company
JKHY Shareholder’s Meeting – Nov’2014
Macro
Industry
Stock
Financials
Valuations
Recomm
11
Recent Acquisitions (2010 – 2014)
28 strategic acquisitions since end of
fiscal year 1999
Integrated
technology &
payment
processing
solutions
Intro
JKHY 10K’2014 Page 6
Company
Payment
Processing
solutions for
credit unions
Macro
Industry
Internet &
telephone
bill payment
services
Stock
Financials
Mobile
banking,
web
development
and dataenriched
marketing
technology
Valuations
Recomm
12
Strengths & Opportunities outweigh the negatives
Strengths
Opportunities
100
Heavy focus on R&D
Robust financial position
Should increase client
base in core banking &
credit union
Should consider
providing SaaS services
50
Strong FCF for M&A
Consolidate Mobile Banking
Solutions
Threats
Weakness
Economic
uncertainty
-50
Relatively small in
comparison to competitors
-100
Highly concentrated
operations & customer base
Intro
Company
Security Threats
Innovations arose out of
acquisitions
Macro
Industry
Larger Banks can start
using their own software
Stock
Financials
Prone to changes in
banking & govt.
regulations
Valuations
Recomm
13
Macro Economic Factors
Improved GDP growth
Increase in Loans Outstanding by Credit Union
Falling Unemployment
Source: U.S. Bureau of Economic Analysis
(http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm)
Bureau of Labor Statistics
(http://data.bls.gov/timeseries/LNS14000000)
Source: Federal Reserve Bank of St. Louis
(http://research.stlouisfed.org/fred2/graph/?id=TOTALTCU)
Intro
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
14
Industry - Business Software & Service
Increase in the IT and business services outsourcing market
The IT and business services outsourcing market was at 170 billion in
2012 and the banking process outsourcing services made up about 85
billion.
Intro
Company
Macro
Source: Hfs Research, 2013 market sizing data
Industry
Stock
Financials
Valuations
Recomm
15
Sustained growth in a Consolidating Industry
Intro
Company
JKHY 2014 Shareholder’s Meeting
Macro
Industry
Stock
Financials
Valuations
Recomm
16
Porter’s 5F Analysis
High & Increasing as
some financial firms
build their own set of
software
Moderate as terms
cannot change
between contract
period
Low as switching
products is costly
Little as major
production is in
house
Medium but
Increasing – Building
trust takes time
Intro
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
17
Stock Market Return
JKHY returns are correlated with the market index but has much higher returns
5 yr annualized returns of 23.29% / Yr
Intro
Yahoo Finance
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
18
Financial Ratio Analysis
Debt/Asset
Greenblatt Ratio
20.00%
0.80
0.70
15.00%
0.60
0.50
10.00%
0.40
0.30
5.00%
0.20
0.10
0.00%
2010
2011
2012
EBIT/Tangible Assets
2013
2010
2014
2011
EBIT/EV
2012
2013
2014
Debt/Asset
Decreasing Debt
Consistent Growth
Lower Volatility
Stable Revenue Stream
Intro
10K
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
19
DuPont Analysis
250.00%
200.00%
150.00%
100.00%
50.00%
0.00%
2010
Tax Burden
2011
2012
2013
2014
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
Intro
Company
Macro
Increasing ROE
•
Decreasing Leverage
•
Increasing asset turnover
Increasing dividend payments
Industry
Stock
Financials
Valuations
Recomm
20
Financial Projections – Income Statement
2014A
Average
Median
2015E
2016E
2017E
2018E
Sales growth rate
7.1%
9.7%
8.6%
8.9%
10.8%
12.8%
13.9% 14.1%
License
-3.3%
0.4%
0.8%
-3.0%
-3.0%
-3.0%
-3.0%
-3.0%
Support and service
8.2%
11.2%
9.9%
10.0%
12.0%
14.0%
15.0%
15.0%
Hardware
-1.2%
-2.1%
-2.4%
-1.7%
-1.7%
-1.7%
-1.7%
-1.7%
Cost of sales yoy
growth
-1.1%
-0.7%
-0.6%
0.8%
0.9%
1.2%
1.1%
1.1%
License
-8.4%
-7.2%
-7.1%
-7.2%
-9.5%
-10.1%
-8.2%
-8.7%
Support and service
-1.5%
-0.9%
-1.0%
-0.9%
-1.0%
-1.2%
-1.1%
-1.1%
Hardware
1.3%
0.2%
0.3%
0.2%
0.3%
0.6%
0.5%
0.4%
Operating expenses
17.3%
18.4%
18.1%
17%
17%
17%
17%
17%
SGA of revenue
11.8%
12.5%
12.3%
11.5%
11.5%
11.5%
11.5%
11.5%
R&D of revenue
5.5%
5.9%
5.8%
5.5%
5.5%
5.5%
5.5%
5.5%
Intro
Company
10K – 2014 Income Statement
Macro
Industry
Stock
Financials
Valuations
2019E
Recomm
21
WACC & FCF Valuation
cost of debt
cost of debt (pre-tax)
tax rate
2.9%
5%
35%
Capital structure Million $ Weight
Debt @ book value
7.75
0.14%
Equity@ mkt cap
5470 99.86%
FCF calculation
EBIT
- Corporate income tax (35%)
- Depreciation and amortization
- Change in working capital
- Capital expenditures
Free cash flow
Cost of equity
risk free rate
market return
market premium
beta (five year)
cost of equity (CAPM)75%
realized return-25%
2014
309.1
108.2
107.8
-4.2
-33.20
279.7
Discount factor
Present value of FCF
Terminal value
Total present value
Shares Outstanding
Price per share
5694.13
85.40M
$66.68
Current Price
$68.86
Intro
Company
Macro
2015E
345.4
120.9
114.3
20.47
-30.83
287.5
1
0.89
257.16
Industry
2016E
388.6
136.0
128.5
27.2
-31.24
322.6
11.8%
2.24%
7.79%
5.55%
1.03
7.97%
23.29%
2017E
446.8
156.4
148.5
35.7
-28.75
374.4
2
0.80
258.18
Stock
WACC
11.79%
Perpetual
growth rate 3.00%
2018E
517.7
181.2
175.0
43.8
-25.10
442.6
3
0.72
268.04
2019E
600.6
210.2
209.0
50.5
-23.77
525.2
4
0.64
283.43
Financials
NORMALIZED
813.53
284.73
209.0
50.5
-23.77
663.6
5
0.57
300.86
4326.46
Valuations
Recomm
22
Sensitivity Analysis
66.68
9.79%
10.79%
11.79%
12.79%
13.79%
1.5%
75.70
66.58
59.27
53.29
48.31
2.5%
83.76
72.62
63.92
56.95
51.24
3.0%
88.68
76.22
66.68
59.06
52.92
3.5%
94.38
80.32
69.70
61.40
54.75
4.0%
101.07
85.03
73.15
64.01
56.77
Intro
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
23
Competitor Analysis

Fidelity National Information (FIS): Offers financial institution core
processing, card issuer, and transaction processing services, including
the NYCE Network




Fiserv (FISV): Provide various financial services technology solutions




Financial Solutions
Payment Solutions
International Solutions
Payments and Industry Products
Financial Institution Services
Globally focused
Total system services (TSS): Provides electronic payment processing
and other services to card-issuing and merchant acquiring institutions



Offers issuer account solutions.
Provides merchant processing and related services.
Globally focused
Intro
Company
Yahoo Finance & 10K’2014
Macro
Industry
Stock
Financials
Valuations
Recomm
24
Valuation - Comparable Transactions
Intro
Source: Capital IQ
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
25
Technical Analysis - 1 Year Data
Intro
Bloomberg
Company
Macro
Industry
Stock
Financials
Valuations
Recomm
26
Recommendation
DCF
Valuation
- $66.68
Comparable
Analysis
Valuation $66.29
Current
Stock
Price $68.89
• 50 Days MA
crosses 100 &
200 Days MA
Growth
• Steady growth
projections
• Long contracts
periods
• 78% recurring
revenue
Momentum
Intro
Company
Macro
Industry
Stock
Business
Financials
Valuations
Recomm
27