The Company Henry Sets Sails For Unprecedented Growth With Digital And Cloud Innovation

Key Takeaways

• Expansion in digital and cloud-based solutions, alongside technology modernization efforts, positions Jack Henry for revenue growth and attracts larger clients.
  
• Shift towards stable, recurring revenue streams evidenced by increased cloud hosting, with a focus on digital banking and payment processing solutions indicating growth avenues.
  
• Challenges including increasing competition, rising R&D and cloud costs, and risks in technology execution may impact Jack Henry's market share and profitability.

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.

• The significant increase in sales bookings, including a record number for both the fourth quarter and fiscal year, signals strong future revenue growth potential, particularly from the 22 competitive core wins and new contracts with financial institutions having over $1 billion in assets. This suggests an expanding customer base and larger average client asset size, impacting future revenue streams.
  
• The focus on technology modernization and the One Jack Henry initiative, alongside investments in innovative solutions, positions the company for enhanced product offerings. This strategy is expected to attract larger clients and support revenue growth through increased uptake of digital and cloud-based solutions.
  
• Jack Henry's expansion in private and public cloud offerings, seen with 73% of core clients now hosted in their private cloud, indicates a continued shift towards more stable, recurring revenue streams. This move is likely to enhance revenue predictability and margins over time.
  
• The notable demand for Jack Henry's digital suite, particularly the Banno platform, with significant growth in registered users and retail clients, suggests a strong growth avenue in digital banking solutions. This user and client base expansion is expected to drive higher revenues from digital banking services.
  
• The company's emphasis on card processing and financial crime solutions to address faster payment transactions and mitigate fraud points to growth in payment processing revenues. Signing new clients in these areas, along with increasing success in faster payments modules installations, indicates potential revenue growth and an enhanced competitive position in payment processing.

Assumptions

• Analysts are assuming Jack Henry & Associates's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.3% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $507.4 million (and earnings per share of $7.06) by about August 2027, up from $378.5 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 31.3x on those 2027 earnings, down from 31.9x today. This future PE is greater than the current PE for the US Diversified Financial industry at 15.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Risks

• A decline in financial institution consolidation may lead to reduced deconversion revenue, impacting overall revenue growth and profitability.
  
• Increasing competition in the financial technology sector could challenge Jack Henry's ability to secure new core contracts and retain existing clients, potentially affecting market share and revenue.
  
• Costs associated with research and development and cloud consumption may continue to rise, potentially impacting operating margins if not offset by corresponding revenue growth.
  
• The risk of execution on technology modernization and new product innovations may impact the company's ability to attract larger financial institutions and sustain revenue growth.
  
• Changes in interest rates or modifications in banking regulations could influence the demand for Jack Henry’s products and services, affecting the company's financial performance and growth projections.

Valuation

• The analysts have a consensus price target of $182.5 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 $205.0, and the most bearish reporting a price target of just $169.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $507.4 million, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $165.47, the analyst's price target of $182.5 is 9.3% 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.