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Jack Henry & Associates, INC. (JKHY)
RCMP Presentation (Existing Company Analysis) 19th March 2015 Prateek Baveja Neha Saoji Siyu Xu
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Agenda Introduction 3 Company Review 7 Macroeconomic Conditions 14
Industry Prospects 15 Stock Market Review 18 Financial Analysis & Projections 19 Valuations 22 Recommendation 27
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Jack Henry & Associates – An Introduction
History Founded by Jack Henry & Jenry Hill in 1976 Headquartered in Monett, Missouri Industry Business Software & Services Serves commercial banks & credit unions Processing transactions Managing information Automating business processes Intro Company Macro Industry Stock Financials Valuations Recomm
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Jack Henry & Associates – Major Product Line
Intro Company Macro Industry Stock Financials Valuations Recomm JKHY Shareholder Meeting – Nov’2014
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Support & Services form major chunk of revenues
Hardware Sales License Intro Company Macro Industry Stock Financials Valuations Recomm JKHY 10K Pages 20-21
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Change in Business Model
Intro Company Macro Industry Stock Financials Valuations Recomm JKHY Shareholder’s Meeting’2014
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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) Initial investment: $7,200 Unrealized gain: $11,736 Intro Company Macro Industry Stock Financials Valuations Recomm Source: Yahoo! Finance RCMP Portfolio
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History of JKHY transactions
Nov 11, 1999 Purchase 200 $36 March 2, 2000 2 for 1 split 400 $18 Mar 4, 2001 800 $9 Jan 15, 2007 Sold 400 $22.53 (realized gain of $5,412) Nov 25, 2013 200 $56.75 (realized gain of $9,550) Dec 4, 2014 Hold 200 $61.90 Intro Company Macro Industry Stock Financials Valuations Recomm Source: Yahoo! Finance RCMP Portfolio
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Recent news at a Glance Intro Company Macro Industry Stock Financials
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
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Chairman of the Board and Chief Executive Officer
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 Kevin Williams CFO & Treasurer Mark Forbis VP & CTO Intro Company Macro Industry Stock Financials Valuations Recomm JKHY Website
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JKHY is among the best places to Work
Intro Company Macro Industry Stock Financials Valuations Recomm JKHY Shareholder’s Meeting – Nov’2014
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Recent Acquisitions (2010 – 2014)
Integrated technology & payment processing solutions Payment Processing solutions for credit unions Internet & telephone bill payment services Mobile banking, web development and data-enriched marketing technology 28 strategic acquisitions since end of fiscal year 1999 Intro Company Macro Industry Stock Financials Valuations Recomm JKHY 10K’2014 Page 6
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Strengths & Opportunities outweigh the negatives
100 Should increase client base in core banking & credit union Robust financial position Should consider providing SaaS services Heavy focus on R&D 50 Strong FCF for M&A Consolidate Mobile Banking Solutions Weakness Threats Economic uncertainty -50 Innovations arose out of acquisitions Security Threats Relatively small in comparison to competitors Prone to changes in banking & govt. regulations -100 Highly concentrated operations & customer base Larger Banks can start using their own software Intro Company Macro Industry Stock Financials Valuations Recomm
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Macro Economic Factors
Improved GDP growth Increase in Loans Outstanding by Credit Union Falling Unemployment Source: U.S. Bureau of Economic Analysis ( Bureau of Labor Statistics ( Source: Federal Reserve Bank of St. Louis ( Intro Company Macro Industry Stock Financials Valuations Recomm
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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 Industry Stock Financials Valuations Recomm Source: Hfs Research, 2013 market sizing data
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Sustained growth in a Consolidating Industry
Intro Company Macro Industry Stock Financials Valuations Recomm JKHY 2014 Shareholder’s Meeting
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Porter’s 5F Analysis Industry Competition Threat of Substitutes Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Consumers 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
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5 yr annualized returns of 23.29% / Yr
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 Company Macro Industry Stock Financials Valuations Recomm Yahoo Finance
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Financial Ratio Analysis
Decreasing Debt Consistent Growth Lower Volatility Stable Revenue Stream Intro Company Macro Industry Stock Financials Valuations Recomm 10K
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DuPont Analysis Increasing ROE Decreasing Leverage
Increasing asset turnover Increasing dividend payments Intro Company Macro Industry Stock Financials Valuations Recomm
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Financial Projections – Income Statement
2014A Average Median 2015E 2016E 2017E 2018E 2019E 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% Support and service 8.2% 11.2% 9.9% 10.0% 12.0% 14.0% 15.0% Hardware -1.2% -2.1% -2.4% -1.7% Cost of sales yoy growth -1.1% -0.7% -0.6% 0.9% 1.2% 1.1% -8.4% -7.2% -7.1% -9.5% -10.1% -8.2% -8.7% -1.5% -0.9% -1.0% 1.3% 0.2% 0.3% 0.6% 0.5% Operating expenses 17.3% 18.4% 18.1% 17% SGA of revenue 11.8% 12.5% 12.3% 11.5% R&D of revenue 5.5% 5.9% 5.8% Intro Company Macro Industry Stock Financials Valuations Recomm 10K – 2014 Income Statement
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cost of equity (CAPM)-75%
WACC & FCF Valuation cost of debt 2.9% cost of debt (pre-tax) 5% tax rate 35% Cost of equity 11.8% risk free rate 2.24% market return 7.79% market premium 5.55% beta (five year) 1.03 cost of equity (CAPM)-75% 7.97% realized return-25% 23.29% WACC 11.79% Perpetual growth rate 3.00% Capital structure Million $ Weight book value 7.75 0.14% mkt cap 5470 99.86% FCF calculation 2014 2015E 2016E 2017E 2018E 2019E NORMALIZED EBIT 309.1 345.4 388.6 446.8 517.7 600.6 813.53 - Corporate income tax (35%) 108.2 120.9 136.0 156.4 181.2 210.2 284.73 - Depreciation and amortization 107.8 114.3 128.5 148.5 175.0 209.0 - Change in working capital -4.2 20.47 27.2 35.7 43.8 50.5 - Capital expenditures -33.20 -30.83 -31.24 -28.75 -25.10 -23.77 Free cash flow 279.7 287.5 322.6 374.4 442.6 525.2 663.6 1 2 3 4 5 Discount factor 0.89 0.80 0.72 0.64 0.57 Present value of FCF 257.16 258.18 268.04 283.43 300.86 Terminal value Total present value Shares Outstanding 85.40M Price per share $66.68 Current Price $68.86 Intro Company Macro Industry Stock Financials Valuations Recomm
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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 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
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Competitor Analysis Fidelity National Information (FIS): Offers financial institution core processing, card issuer, and transaction processing services, including the NYCE Network Financial Solutions Payment Solutions International Solutions Fiserv (FISV): Provide various financial services technology 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. Intro Company Macro Industry Stock Financials Valuations Recomm Yahoo Finance & 10K’2014
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Valuation - Comparable Transactions
Intro Company Macro Industry Stock Financials Valuations Recomm Source: Capital IQ
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Technical Analysis - 1 Year Data
Intro Company Macro Industry Stock Financials Valuations Recomm Bloomberg
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Comparable Analysis Valuation - $66.29
Recommendation DCF Valuation - $66.68 Comparable Analysis Valuation - $66.29 Current Stock Price - $68.89 Momentum 50 Days MA crosses 100 & 200 Days MA Growth Steady growth projections Business Long contracts periods 78% recurring revenue Intro Company Macro Industry Stock Financials Valuations Recomm
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