Cloud Migration And Payment Solutions Will Open New Markets

Key Takeaways

• Emphasis on cloud migration and technology modernization suggests potential growth in recurring revenue and market expansion.
  
• Growth in payment solutions and core deals promises higher revenue from expanded services and larger clients.
  
• Economic challenges and industry consolidation may hinder Jack Henry & Associates' revenue growth, while strategic investment limitations could impact margin expansion and future earnings.

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's increased emphasis on cloud migration, with 76% of clients now using their private cloud environment, indicates potential for strong recurring revenue growth and margin expansion from cloud services.
  
• The company has secured larger core deals over the past two years, with significantly larger aggregate assets, which suggests future revenue growth as larger institutions typically generate higher revenues.
  
• Continued investments in technology modernization, such as the new public cloud-native Jack Henry Platform and SMB solutions, are poised to support long-term revenue growth and expand the company's footprint in new markets.
  
• Growth in the payments segment, driven by increased adoption of faster payment solutions like Zelle, RTP, and FedNow, suggests the potential for ongoing revenue increases and enhanced margins due to the high incremental nature of these services.
  
• Anticipated increases in financial institution M&A activity and client acquisitions indicate possible future revenue opportunities from integration and conversion services, which could boost both revenue and earnings.

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 18.7% in 3 years time.
• Analysts expect earnings to reach $526.7 million (and earnings per share of $7.36) by about May 2028, up from $405.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.8x on those 2028 earnings, up from 30.9x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Jack Henry & Associates Future Earnings Per Share Growth

Risks

• The recent slowdown in hardware sales and ongoing delays in nonrecurring projects may negatively impact non-GAAP revenue growth, leading to potential headwinds in total revenue.
  
• Increased deconversion revenue due to client mergers and acquisitions could indicate a higher pace of industry consolidation, which may result in the loss of future recurring revenue from clients who exit the platform, thereby affecting overall revenue growth.
  
• The greater focus on expense management and discretionary spending controls could limit flexibility in strategic investments, potentially affecting margin expansion and future earnings growth.
  
• Macroeconomic concerns, including softening consumer-related payments and shifts in debit usage, could lead to lower processing revenue, which is a significant contributor to long-term growth.
  
• Uncertainties related to client M&A activities may result in lumpiness or variability in future revenue, particularly if key clients are acquired by competitors, resulting in the risk of revenue loss from contract terminations.

Valuation

• The analysts have a consensus price target of $190.381 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 $155.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $526.7 million, and it would be trading on a PE ratio of 31.8x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $172.02, the analyst price target of $190.38 is 9.6% higher.
  
• 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.