Jack Henry and Associates Inc (JKHY)

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Jack Henry and Associates Inc (JKHY)
RECOMMENDATION BUY
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Background

• Founded in 1976 by John W. Henry (currently vice
  chairman) and headed since 1994 by his son
  Michael JKHY is a computer software company that
  develops banking software systems. The Company's
  revenues are predominately earned by marketing
  those systems to financial institutions
  nationwide along with the computer equipment
  (hardware) and by providing the conversion and
  software customization services necessary for a
  financial institution to install a JKHY software
  system. JKHY also provides continuing support
  and maintenance services to customers using the
  system.

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Background

• The companys primary systems are CIF 20/20
  (designed for community banks,savings banks and
  thrifts with up to 300M in assets and runs on IBM
  computers), and Silverlake (for larger banks with
  assets of 100M to 10B). JKHY licenses its
  systems to the customer with a nontransferable
  right to use the software for 25 yrs on 1
  computer at 1 location. JKHY also provides
  outsourcing solutions including data and item
  processing, ATM software, etc.

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Background
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Background
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Balance Sheet

• Health B/S with no LT debt
• Increasing BV per share

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Proforma Income Statement 1/2
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Proforma Income Statement 2/2
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DuPont Analysis

• No significant problems apparent

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Cash Flow

• Consistant increase in operating flows
• 1999 decrease in cash position due to acquisition
  of BancTec
• Firm has sufficient cash for operations

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Firm Ratios and Comparisons

• The industry being Computer Networks
• Price to X ratios indicate a relatively cheaper
  stock price
• Growth is not as strong as the industrys,
  however the firm has significantly better
  percentage returns
• Must increase purchase credit period and reduce
  collection period

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Dividend Discount Model

• A.G. Edwards has placed a price objective of 46
• Jack Henry is extremely cheap these days'
  George K. Baum said (Feb99 when stock was
  trading at 34 3/4)
• Firms covering stock A.G. Edwards, Prudential,
  Pauli Johnson, George K. BaumRecommended STRONG
  BUY by all 4.

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Risk factors affecting Firms business and
prospects

• Technological ChangeSuccess depends on ability
  to enhance current products. (SS JKHY track
  record has shown its ability to keep up with
  change)
• Aggressive CompetitionSome competitors have
  strong financial, marketing, manufacturing and
  technological resources, broad product lines and
  larger installed customer bases than does the
  Company (SS However, JKHY has been making steps
  such as its IBM relationship which provide it
  with many of the required resources)
• Dependence on IBM RelationshipThe Companys
  products incorporate and use computer hardware
  and equipment developed by IBM. There can be no
  assurance that IBM will continue to manufacture
  hardware that supports the Company s product
  lines or that IBM s products will be available to
  the Company on a timely basis. (SS JKHY with
  its recent acquisition of BancTec has given it
  the ability to enter the UNIX and NT markets)

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Risk factors affecting Firms business and
prospects

• Changes in the Banking and Financial Services
  IndustriesThe Company s primary market for its
  products consists of approximately 8,800
  commercial banks in the United States. The
  number of commercial banks in the United States
  has decreased, and will continue to decrease due
  to the increasing consolidation of banks around
  the country
• Y2K ComplianceY2K compliance is dependent on
  many factors, some of which are not completely
  within JHA's control. Should the systems of one
  or more significant vendors or suppliers fail to
  achieve Y2K compliance, the Company s business
  and financial condition could be adversely
  affected (SS JKHY supports that the firm and all
  its systems are Y2K compliant)

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Acquisitions / Prospects

• BankVision subsidiary sale The sale of this
  small international venture allows us to focus
  our efforts on sustaining the strong momentum
  we've built in our domestic operations, stated
  Michael E. Henry, CEO
• Peerless acquired Will give JKHY the ability to
  furthur penetrate the credit union market
• Purchase of BancTec's Community Banking and Data
  Center Operations BancTecs products operate
  primarily on a UNIX platform, while Jack Henry's
  core products and services operate primarily on
  the IBM A/S 400 platform. "In addition, the
  majority of the customers acquired have assets
  under 250 million, which is a segment of the
  market that in the past few years has generated
  strong demand for our ancillary products such as
  Internet banking, ATM switch processing and check
  imaging. We have already begun transitioning
  these services to the UNIX and NT platforms and
  will be offering them to these new customers in
  the near future. (UNIX holds between 20-30 of
  the market)
• This acquisition expands our customer base by
  almost 50

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Acquisitions / Prospects

• JKHY and Universal Pensions expand partnership to
  integrate UPIs IRA service center into JKHYs
  NetTeller internet banking solutions. NetTeller
  is the 1 installed online banking product within
  the industry with over 200 bank customers. With
  lt10 of banks offering internet banking there
  appears a lot of growth potential
• Why the huge drop in stock price in early 1999?
• Slowly and steadily, shares of Jack Henry
  Associates Inc. have tumbled 37 from a high in
  November. Analyst Robert Meeder at George K. Baum
  Co. said strong earnings had been Jack Henry's
  undoing. This company is actually being
  punished for having extra success this year,''
  Meeder said. The stock market has trimmed Jack
  Henry's stock price, Meeder said, because the
  company won't be able to increase its earnings
  next year as much as it has this year. Investors
  don't seem to care that its lower future earnings
  growth still is expected to be twice that of the
  companies in the Standard Poor's 500 index, he
  said. Meeder remains bullish on Jack Henry's
  shares and said the drop in share prices marked
  an opportunity for patient investors.

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Summary

• Leader in its industry
• Undervalued (punished for exceptional growth)
• Price to X ratios at a discount to industry
• According to AG Edwards and DDM the stock is
  trading at an 18 discount
• Excellent margins
• Good prospects for the future
• Highly recommended by all brokers covering
• Increase in EPS the last 8 years

RECOMMENDATION BUY