Henry's Cloud-Driven Innovation And Calculated Partnerships Boost Revenue And Market Positioning

Key Takeaways

• Strong cloud-related services growth and cloud-native platform strategy are expected to drive new business and long-term revenue growth.
  
• Expansion in digital solutions and strategic partnerships is likely to enhance revenue, support scalability, and improve market positioning.
  
• Slower growth in on-premise services and tech integration challenges, alongside competitive pricing pressures and macroeconomic factors, pose risks to revenue and margin stability.

Catalysts

A financial technology company that connects people and financial institutions through technology solutions and payment processing services that reduce the barriers to financial health.

• Jack Henry is expecting robust sales and revenue growth driven by an increase in cloud-related services, with private and public cloud offerings growing over 11% in the quarter. This strong reoccurring revenue growth is expected to impact overall revenue positively.
  
• The company's strategy of breaking out key components of the core and building them in a cloud-native API-first platform, the Jack Henry platform, is anticipated to drive new business by appealing to financial institutions looking for modern solutions, likely improving revenue and long-term growth.
  
• Jack Henry’s expansion in faster payments and the Banno Digital Solutions platform, with a significant increase in clients and registered users, indicates a growing demand that is expected to enhance revenues and potentially improve net margins due to the scalable nature of digital solutions.
  
• The continued success in competitive core wins, including institutions with over $1 billion in assets, is poised to increase revenue through new contracts and potential upsell opportunities with larger clients.
  
• Jack Henry's focus on open technology and partnerships, as seen with strong interest at their conference and collaborations like the one with Moov, allows them to engage with a broader fintech ecosystem, likely supporting a future increase in revenue and market positioning.

Jack Henry & Associates Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jack Henry & Associates's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.8% today to 19.3% in 3 years time.
• Analysts expect earnings to reach $533.6 million (and earnings per share of $7.41) by about November 2027, up from $399.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.1x on those 2027 earnings, down from 32.0x today. This future PE is greater than the current PE for the US Diversified Financial industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Jack Henry & Associates Future Earnings Per Share Growth

Risks

• Slower growth rates in on-premise annual maintenance and card processing are impacting revenue and net margins, posing a risk to maintaining the current financial performance levels.
  
• Challenges in implementing new technologies, such as integrating digital banking solutions with third-party cores, could lead to delays, impacting revenue realization timelines and possibly affecting earnings growth.
  
• Significant competition and potential pricing pressures in the fintech and financial services space, as indicated by aggressive pricing by competitors, may affect Jack Henry's ability to maintain its sales momentum and revenue growth.
  
• Revenue is subject to fluctuations due to macroeconomic factors impacting transaction volumes, such as card processing and consumer spending patterns, which may lead to variability in revenue and cash flow.
  
• The company's reliance on long implementation times for products like Financial Crimes Defender and other solutions could constrain revenue growth if there are delays, impacting earnings and future margin expansion.

Valuation

• The analysts have a consensus price target of $192.36 for Jack Henry & Associates based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $212.0, and the most bearish reporting a price target of just $175.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.8 billion, earnings will come to $533.6 million, and it would be trading on a PE ratio of 31.1x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $174.95, the analyst's price target of $192.36 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.