Dec 4, 2014Yuan Chen, Refky Saputra, Yiqi (Delia) Ye
Where tradition meets technology
Agenda
Current Holdings & Relevant Stock Market Performance Company Overview Business Strategy & Management Outlook Macroeconomic Overview Industry Overview Financial Analysis Valuation Recommendation
Current share price = $61.90
Current holding value = $12,380
Constitutes 6.47% of invested holdings (without cash)
Constitutes 2.99% of invested holdings (with cash)
Initial investment: $7,200
Unrealized gain: $10,580
Source: Yahoo! Finance RCMP Portfolio (https://finance.yahoo.com/portfolio/pf_1)
Nov 11, 1999 Mar 2, 2000 Mar 4, 2001 Jan 15, 2007 Jan 15, 2007Nov 25, 2013
Purchased: 200 shares @ $36 per share
2 for 1 split: 400 shares @ $18 per share
2 for 1 split: 800 shares @ $9 per share
Sold: 200 shares @ $56.75 (realized gain of $9,550)
Sold: 400 shares @ $22.53 (realized gain of $5,412)
Hold: 200 shares @ $61.90
Current Holdings
ABBV ABT AEO AL COF JKHY LF NHC PETM SNA UNP WAG ZIXI
6.47%
Dec-12 Feb-13 Apr-13 Jun-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-140%
10%
20%
30%
40%
50%
60%
JKHY S&P 500 NYSE TMT Index
Source: Bloomberg Finance as of Dec 3, 2014
Market Cap (USD) 5,061.9M 52 Week High @ Dec 1, 2014 $62.46
Shares outstanding 81.8M 52 Week Low @ Oct 15, 2014 $51.86
Free float 98.69% YTD Change/% $2.69/4.54%
60%
47%
27%E
E
E
E
E E EE
Trading snapshot
2-year stock price movement against benchmarks & positive earnings release impact
Relevant stock market performance
Founded by Jack Henry and Jerry Hall in 1976 Headquartered in Monett, Missouri Listed on NASDAQ on October 29, 1985 Industry: Business Software & Services
Processing transactions Managing informationAutomating business process
Source: Jack Henry & Associates 10K 2014 Page 4
Serves nearly 11,300 financial institutions and diverse corporate entities
Providing three arrays of products and services within information processing
Key facts and brief history
Company overview
Provides enterprise-wide automation and data services to commercial banks
Clients include 1,200+ banks ranging from community institutions to mid-tier banks with assets of up to $30 billion
Founded in 1985 and acquired by JKHY in 2000 Provides core data processing solutions for credit unions Serves credit unions of all sizes, with 780+ credit union customers
Provides specialized products and services to financial institutions that are non-core customers
Serves financial services organizations of all asset sizes and charters, and diverse corporate entities with approximately 10,800 domestic and international customers
Source: Jack Henry & Associates 10K 2014 Page 7
Business segments
Jack Henry Banking
Symitar
ProfitStars
Others7400
JKHY1200
# Banks with $30.0 billion in assets
# Credit unions of all size
Others6020
JKHY780
11%
14%
Revenue breakdown over time
Source: Jack Henry & Associates 10K 2014 Page 20 - 21
2010 2011 2012 2013 20140
200
400
600
800
1,000
1,200
86%88% 89%
90%91%
8%
6% 6%
5% 5%
6%
5% 5%
5% 4%
837
967 1,027
1,129 1,210
Support and service Hardware sale LicenseSeries4
Revenue(m)
License Sale and delivery of
proprietary application software systems contracted with the firm by customers
Hardware Sale Agreements with hardware
manufacturers to sell computer hardware, maintenance and related services to customers
Support and service Annual support to assist the
customer in operating their systems and to enhance and update the software
CAGR of 10%
Revenue sources
Source: Jack Henry & Associates 10K 2014 Page 6
Expanding each core customer relationship by cross-selling complementary products and services to enhance functionality
Maintaining a company-wide commitment to customer service and generates high levels of customer retention
Providing commercial banks and credit unions with core software systems that provide excellent functionality
Supporting in-house and outsourced operating environments with identical functionality
Business Strategy
Generate organic revenue and earnings growth through enhancing functionality
Maintain in-depth and sustainable customer relationship
Fiscal Year Company or Product Name Products and Services
2014 Mobile banking, web development and data-enriched marketing technology
2010 Internet and telephone bill payment services
2010 Payment processing solutions for credit unions
2010 Integrated technology and payment processing solutions
Source: Jack Henry & Associates 10K 2014 Page 6
Started acquiring other companies in 1992, gone through 28 material acquisitions since fiscal end of 1999
Increasingly difficult to find targets given the comprehensive products offering after 38 years in business
Alternative ways of leveraging cash, including repurchase
Business Strategy
Continue seeking opportunities to capitalize on diversification and strategic acquisitions
Recent acquisitions
Source: Jack Henry & Associates 10K 2014 Page 19
Management Outlook
Anticipation about the future market environment
Cautiously optimistic about future business operation
Continued consolidation within the financial services industry
Intensified regulatory conditions and legislation such as Dodd-Frank and Consumer Protection Act
Motivation for some financial institutions to postpone discretionary spending
Revenue growth coupled with company’s continued focus on cost management Gross margin expected to be driven up gradually
Recurring revenue and healthy sales pipeline continue to drive majority of business
Customers continue to face regulatory and operational challenges Greater need for solutions addressing institutional profitability and efficiency
Strong balance sheet, access to extensive lines of credit Position the firm well to address current and future opportunities
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)
Macroeconomic Overview
Quarter to Quarter GDP Growth Monthly Unemployment Rate
Note: Real GDP growth is measured at seasonally adjusted annual rates.
In general, the economy has shown a great performance. GDP has grown 5.9% in the last quarter and the unemployment rate went down to 5.8% on October
Banking and credit union industry is expected to grow along with the recovery of the economy. However, they are still finding trouble with the existing regulation
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
7,000
7,200
7,400
7,600
7,800
8,000
8,200
8,400Total Loans
lOAN
($ b
ILLI
ON
)
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
200
220
240
260
280
300 Consumer Loan Outstanding (by Credit Union)$
Billi
on
Banking Improvement in the job market has created a
bigger demand for consumption loan Numerous banks are doing consolidation to
become a larger banks Dodd-Frank has put lots of limitations on
Product and Services development
Credit Union Auto loan is starting to revive for the past
couple of months Housing loan is up ticking slowly but steadily Investment loan is still not growing as its
expected New regulations that are more difficult to
comply with
Macroeconomic Overview
Source: Federal Reserve Bank of St. Louis (http://research.stlouisfed.org/fred2/graph/?id=TOTALTCU)
Source: World Retail Banking Report 2013, Capgemini Analysis
Macroeconomic Overview
Big Data Technology and Customer Relationship Management are very important part in modern banking business. Outsourcing the business would be much more efficient for the company
Big data technology for enhancing customer centricity in banking
Knowledge of Customer
Consistent Multi-Channel
Experience
Product-Channel Fit
Intimacy and Relationship
Building
Trust and Confidence
Customer BankRelationship
External Unstructured
Data
Internal Unstructured
Data
Structured Data
Big Data
Analytical CRM
Operational CRM
Customer Relationship Management
(CMR)
A combination of structured and unstructured data that represents the entire field of data the firm can utilize to increase its understanding of its customers
A customer-centric tool which helps banks to optimize costs, increase revenues and enhance customer satisfaction
Porter Five Forces
Innovative technology is important for banking industry
Bigger banks tend to internalize the service
Bargaining Power of BuyersLow-Medium
Hardware and software markets are very competitive
Bargaining Power of SuppliersLow
CompetitionMedium
Innovative product Brand advantage Consolidations in
software industry
Bank consolidations High switching cost
Threat of SubstitutesMedium
Barriers to entryHigh
Difficulty to get a new client Economies of Scale
Weakness
Relatively small to competitors Past innovations are based on
acquisitions
Strength
Consistent stream of cash flow Strong free cash flow for
repurchase and acquisitions Good management team Strong market share
Opportunities
Banking and credit union industry is growing and restructuring towards more efficient IT systems
More banks and credit unions are thinking of IT system outsourcing
Regulation creates new demand
Threat
Larger banks may internalize IT systems
Uncertainty in the economy High dependence on banking
industry and its regulation
SWOT Analysis
Technical Analysis
Source: Bloomberg Finance as of Dec 3, 2014
Recent Financial Information
Operating Efficiency
2011 2012 2013 201410%
15%
20%
25%
30%
Operating Profit Margin Net Margin
Share repurchase & Dividends
2011 2012 2013 20140
50
100
150
0%
10%
20%
30%
40%
Dividends paid Stock RepurchaseDividend Payout Ratio
Source: Jack Henry & Associates 10K 2014 Item 8
Improving Profitability Increasing cash distribution to shareholders through dividends and repurchase
Ratio Analysis
2011 2012 2013 20140%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Tax Burden Operating Profit Margin
ROE Interest Burden
Asset Turnover Leverage
Dupont Analysis
2011 2012 2013 2014 0.18
0.23
0.28
0.33
EBIT/Tangible AssetsEBIT/EV
Greenblatt Ratios
Stable Revenue Stream Low Volatility Decreasing Debt Consistent Growth
Debt/Asset Ratio
2011 2012 2013 20140%
3%
6%
9%
Debt/Assets
Source: Jack Henry & Associates 10K 2014 Item 8
Comparable Analysis
Source: Capital IQ, Yahoo Finance: http://finance.yahoo.com/q/co?s=JKHY+Competitors
Target Company Ticker Symbol (Exchange)
Price at 12/03/14 Close
Shares Outstanding (millions) Equity Value Enterprise Value
Price/Book Value
TEV/Total Revenues LTM - Latest
TEV/EBITDA LTM - Latest Forward P/E
Jack Henry & Associates Inc. NasdaqGS:JKHY 61.90$ 81.80 5,038.20$ 5,009.80$ 4.97x 4.10x 11.80x 22.92x
Comparable CompanyFidelity National Information Services, Inc. NYSE:FIS 61.43$ 283.80 17,430.80$ 21,930.50$ 2.69x 3.50x 13.70x 18.13x Total System Services, Inc. NYSE:TSS 32.97$ 185.90 6,129.10$ 7,355.40$ 3.65x 3.00x 12.60x 15.38x Euronet Worldwide Inc. NasdaqGS:EEFT 57.11$ 52.60 3,003.90$ 2,933.40$ 4.19x 1.90x 14.00x 19.90x Global Payments Inc. NYSE:GPN 83.32$ 67.60 5,635.50$ 7,240.00$ 6.20x 2.80x 13.40x 17.76x DST Systems Inc. NYSE:DST 98.33$ 38.10 3,742.40$ 4,267.10$ 3.34x 1.60x 9.30x 16.78x CoreLogic, Inc. NYSE:CLGX 32.75$ 89.70 2,939.00$ 4,212.30$ 2.88x 3.20x 15.50x 20.43x Heartland Payment Systems, Inc. NYSE:HPY 54.59$ 36.20 1,977.30$ 2,451.30$ 7.31x 1.10x 15.10x 18.79x WEX Inc. NYSE:WEX 103.02$ 38.80 3,993.90$ 4,592.90$ 4.24x 5.80x 13.90x 20.70x
Multiple Low Median High Mean Low Median High Mean Price/Book Value 2.69 3.92 7.31 4.31 33.50 48.82 91.04 53.71 TEV/Sales 1.10 2.90 5.80 2.86 16.39 43.27 86.59 42.71 TEV/EBITDA 9.30 13.80 15.50 13.44 48.22 71.58 80.40 69.70 Forward P/E 15.38 18.46 20.70 18.48 41.54 49.85 55.90 49.92
Multiple Statistics Implied Jack Henry Share Price
Multiple WeightImplied JKHY Price
Price/Book Value 20% 53.71 TEV/Sales 20% 42.71 TEV/EBITDA 50% 69.70 Forward P/E 10% 49.92 Jack Henry Implied Stock Price 59.13$
Revenue Projections
Source: Jack Henry & Associates 10K 2014 Financial Statements
Income Statement (in millions)2010 2011 2012 2013 2014 2015 2016 2017 2018
REVENUELicense 52.2 53.1 54.8 54.8 53.0 52.5 52.0 52.0 52.0
yoy growth 1.6% 3.3% 0.0% -3.3% -1.0% -1.0% 0.0% 0.0%Support and service 720.5 852.3 909.2 1015.2 1098.4 1296.1 1490.5 1669.4 1836.3
yoy growth 18.3% 6.7% 11.7% 8.2% 18.0% 15.0% 12.0% 10.0%Hardware 63.9 61.6 63.1 59.4 58.7 58.1 57.5 57.5 57.5
yoy growth -3.6% 2.5% -6.0% -1.2% -1.0% -1.0% 0.0% 0.0%Total revenue 836.6 966.9 1027.1 1129.4 1210.1 1406.6 1600.0 1778.8 1945.8
yoy growth 15.6% 6.2% 10.0% 7.1% 16.2% 13.7% 11.2% 9.4%
COST OF SALESCost of license 5.8 6.29 6.11 4.82 4.27 4.20 4.16 3.64 3.64
yoy growth 8.4% -2.8% -21.1% -11.4% -1.7% -1.0% -12.5% 0.0%Cost of support and service 438.5 515.92 551.29 603.92 643.44 751.74 857.04 951.54 1,037.51
yoy growth 17.7% 6.9% 9.5% 6.5% 16.8% 14.0% 11.0% 9.0%Cost of hardware 47.2 45.36 45.98 43.65 43.71 42.80 42.37 42.37 42.37
yoy growth -3.9% 1.4% -5.1% 0.1% -2.1% -1.0% 0.0% 0.0%Total cost of sales 491.5 567.563 603.379 652.394 691.424 798.73 903.57 997.55 1,083.52
yoy growth 15.5% 6.3% 8.1% 6.0% 15.5% 13.1% 10.4% 8.6%
GROSS PROFIT 345.09 399.33 423.73 476.99 518.63 607.92 696.39 781.27 862.23yoy growth 15.7% 6.1% 12.6% 8.7% 17.2% 14.6% 12.2% 10.4%% of revenue 41.3% 41.3% 42.2% 42.9% 43.2% 43.5% 43.9% 44.3%
ForecastFor Period Ending June 30,
Projected Income Statement for JKHY
Discounted Cash Flow Analysis
Source: Jack Henry & Associates 10K 2014 Item 8
CAPM Cost of Equity Weight
Beta 0.95 7Risk-Free 1.54% 5 YrMarket Risk Premium 6%CAPM Cost of Equity 7.22%
Cost of Equity CalculationCAPM Cost of Equity 7.22% 80%Realized Return 22.35% 20%
Cost of Equity 10.25% 98%Cost of Debt 4.58% 2%
Business Risk Premium 0.20%
Discount rate: 10.32%
WACC Calculation
Weighted Average Cost of Capital
10.12%
Discounted Cash Flow for Jack Henry & Associates
2014 2015 2016 2017 2018 TerminalEBIT 372.4 431.7 490.5 546.1
Less: Cash Paid for Taxes (131.3) (151.9) (172.0) (191.5) NOPAT 241.1 279.7 318.5 354.6
Add: Depreciation 53.1 53.7 56.9 57.5 Capital Expenditures (58.3) (66.3) (73.7) (80.6) Change in Net Working Capital 23.0 16.3 10.5 5.2
Free Cash Flow 258.9 283.5 312.2 336.8 5,109.3 Present Value of Free Cash Flow 234.7 232.9 232.5 227.4 3,449.1
Implied EV 4,377 Discount rate 10.32% Less Debt (4)
Terminal Growth 3.50% Implied Market Cap 4,373
Shares Outstanding 81.800 Implied Share Price 53.46$
VALUATION
Free Cash Flow Analysis
Recommendation
• Weight: 40%• Price: $53.46 DCF Method
• Weight: 60%• Price: $59.13
Comparable Multiples Method
HOLD
Implied Price: $56.86Current Price: $61.90
Valuation Summary
Questions?
Where tradition meets technology
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