Jack Henry & AssociatesPresented November 11, 2008
Yan HuangShuang ChengGuang LuChien-Lung Chiang
Part 1: Company OverviewCompany OverviewBusiness Model and Revenue ModelIndustry Analyst and Main CompetitorsSWOT AnalysisRCMP Position
Company Overview
•Founded in 1976• John W. “Jack” Henry visualized and wrote
the company's first core banking software package
•Provides integrated computer systems and data processing solution for commercial banks
•Publicly traded in 1985 (NASDAQ:JKHY)•Headquarters in Monett, Missouri•1.53 Billion market capital
Three divisions
Jack Henry Banking•Provider of the integrated automation
banks need to process business information and financial transactions
•Supports approximately 1,700 banks•Two key markets:
Jack Henry BankingJack Henry banking solutions encompass :
Jack Henry Banking
Three functionally distinct core banking platforms
SYMITAR
•Founded in 1985 •Acquired in 2000•Provide core information and transaction
procession solutions for credit unions•More than 700 credit unions•approximately 50 integrated
complementary products and services
SYMITAR
•Functionally distinct core processing solutions are:
PROFITSTARS
•Launched in 2006•Two Functional segments:
Business Model by Section
Business Model by Function
Business Model by Diverse Clients
Revenue Model
Growth by Acquisitions (1)Date Company Capital Size Service
20049/1
Banc Insurance (bank)
$6.7Mn in cash + earn-out payment
Turnkey outsourced insurance agency solution for FIs
200410/1
Select Payment Processing
$12Mn in cashInnovative electronic payment processing solution for FIs
200410/1
Verinex Technologies(bank)
$35Mn in cashLeading developer and integrator of biometric security solutions
200411/2
3Optinfo (bank)
$12.93Mn in cash + $2.2Mn vested options
Leading provider of enterprise exception management software and services
200412/1
TWS System and three affiliated corp (Credit Union)
$10.89Mn in cash
Leading provider of image-based item processing solution for CU
200412/1
7
SERSynergy (bank)
$34.47Mn in cash
Market leader for intelligent document management
Growth by Acquisitions (2)Date Company Capital Size Service
20051/1
RPM Intelligence (bank)
$6.24Mn in cash, earn-out payments $0.25Mn in 06
Customer and product profitability solutions for FIs(Stratika)
20053/2
Tangent Analytics (bank)
$4Mn in cash, 5.01 Mn earn-out payments
business intelligence software systems
200511/1
Profitstar (Bank) $19.32Mn in cashLeading provider of software to banks and CUs
200611/1
Margin Maximizer Group (bank)
$34Mn in cash
Leading provider of Loan and deposit pricing software and services to banks and CUs (USBA)
20077/1
Gladiator Technology Services (bank)
$17.43Mn in cash
Technology security services for FIsEnterprise Security Monitoring
200710/1
AudioTel Corporation (bank) $32.09Mn
Remittance, merchant capture, check imaging, doc imaging and management, and telephone and internet banking solution
Industry Analysis
Financial Software ServiceSustainable competitive advantage:•Leading technology in security and
operation•High quality maintaining service•License and renewed contracts
•Industry Composite 631 •Jack Henry ranks 9th
Main competitors
Main competitors
S•Good history of dividends payment
•Sustainable growth rate
•Wide products and services, risk diversified well
W•Jack Henry’s capital size and revenue ranked 9th among its competitors
•Less resources to invest in upgrading systems
•Margins in Jack Henry's service and support segment are relatively low
O
•Banks and Credit Unions relies on core processing systems provided by Jack &Henry
•High liquidity, low debt, ability to catch acquisition opportunities
•Leading research team to maintain sustainable competitive advantages
•Regulatory changes2 T
•Downward trend banking industry is shrinking Jack Henry's customer base•Ongoing declines in the price of computer hardware •Huge Switching cost makes Jack Henry difficult to compete for new business
Stock Performance
RCMP Position• November 11, 1999 entered position
▫ 200 shares at $36 per share• March 3, 2000
▫ Stock split 2:1• March 5, 2001
▫ Stock split 2:1• January 15, 2007
▫ Sold 400 shares at $22.53• Current position
▫ Own 400 shares ▫ Stock price $18.03 as of November 10th, 2008
Part 2: Accounting AnalysisBalance SheetIncome StatementCash FlowDuPont Analysis2009 1st Quarter Earning Review
Asset
Liability
Equity
Revenue
66% 68%72%
75% 78%
13% 15%14%
11%10%
21% 17% 14% 14% 12%
Growth Rate over past 5 years
Growth Profit Margin over past 5 years
Income Statement
Financial Health
DuPont Analysis
ROE
17.33%
17.49%
15.63%
ROA
10.21%
10.47%
9.92%
Equity Multiplier
1.70
1.67
1.58
2008
2007
2006X=
Profit Margin
14%
16%
15%
Asset Turnover
0.73
0.67
0.65
2008
2007
2006
X=
ROA
10.21 %
10.47 %
9.92 %
Cash Flow
Period Ending 2008 2007 2006
Net Income 104,222 104,681 89,923
Total Cash Flow From Operating Activities 181,001 174,247 169,438
Total Cash Flows From Investing Activities (102,148) (92,911) (77,190)
Total Cash Flows From Financing Activities (101,905) (66,858) (29,717)
Change In Cash and Cash Equivalents (23,052) 14,478 62,531
Cash flow at the beginning of the year 88,617 74,139 11,608
Cash flow at the end of the year 65,565 88,617 74,139
1st Quarter Earning Review•5% increase in revenue•Strong growth in support and services
revenue▫grows at 10%▫One time implementation revenues decreased▫Electronic payments revenue increased 16%
•Other revenue▫License revenue decreased 2 %▫Hardware sales decreased 24%
Part 3: Valuation
AssumptionsDiscounted Cash Flow ModelRelative Valuation Model
Assumptions on Growth Rate
Growth Estimation
Sustainable Growth Rate: 3.2%
Assumptions on Margin
GPM (License) 90.9%
GPM (Support and Services) 37%
GPM (Hardware) 25-27.3%
Operating Expense/Sales 20.2%
Interest Expense/Debt 3.5-7.5%
Other Assumptions
CAPEX/Sales 5.7%
Depreciation Rate 8.3%
Acquisition
10,000
10,988
60,419
69,192
79,533
91,713
84,354
69,536
49,460
27,141
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
In USD Thousands
WACC
Capital Structure Market Value (USD Mn) Weight
Equity 1,571 98.7%
Debt 20 1.3%
Cost of Capital Value Source
Risk Free Rate 4.74% 1998-2008 average of 10-y treasury bond yield
Risk Premium 6% Historical data
Beta 1.058Calculation of data from
Yahoo Finance (5-y weekly return)
Cost of Debt 3.11% 2008 Annual report
Effective Tax 36.2% 2004-2008 Annual report
WACC 10.97%
DCF Valuation
Discounted Operating Cash Flow 1,576
Add: Non-Operating Assets 26
Firm Value 1,602
Value of Debt 20
Value of Equity 1,582
Outstanding Shares 86.05
Value per Share $18.39
(In USD Mn)
Sensitivity Analysis Sustainable Growth Rate 1% 2% 3% 4% 5%
WACC
9%20.76 22.83 25.58 29.44 35.23
10%17.84 19.31 21.21 23.74 27.29
11%15.60 16.70 18.07 19.83 22.19
12%13.70 14.52 15.52 16.76 18.37
13%12.20 12.83 13.58 14.50 15.65
14%10.96 11.44 12.02 12.71 13.56
Relative Valuation
Multiples Calculation
Triangulation
Part 4: Recommendation
Holdings Position
CorrelationCORR
JKHY CPRT AEE AEO DO FR KMB WFR SRCL WAGJKHY 1.00CPRT 0.42 1.00AEE 0.65 0.36 1.00AEO 0.45 0.42 0.38 1.00DO 0.44 0.41 0.48 0.19 1.00FR 0.71 0.48 0.63 0.42 0.63 1.00
KMB 0.71 0.36 0.74 0.39 0.39 0.59 1.00WFR 0.46 0.50 0.36 0.25 0.50 0.49 0.35 1.00SRCL 0.62 0.41 0.57 0.39 0.47 0.63 0.56 0.45 1.00WAG 0.60 0.47 0.64 0.56 0.45 0.61 0.59 0.45 0.57 1.00
Recommendation
•DCF model price: $18.39•Price range from sensitivity analysis:
Min=$14.52, Max=$23.74•Triangulation: $17.01
•Current price: $18.03 as of 11/10/08
•Recommendation: HOLD 400 shares with a limit sell at $20.40 before 12/19/08.
Recap•Current Market Price VS Fair Value $17.75 $17.01
•Our goal: ▫Hold the 400 shares at current market
price▫Sell the 400 shares when overvalued by
20%
Three Options1. Buy Put Option2. Sell Call Option3. Limit Sell
1. Buy Put Option
Option Type Expiration Date
Ask Price
Put (20.00) Dec 19,08 3Put (22.50) Dec 19,08 5.1Put (25.00) Dec 19,08 7.7Put (20.00) Nov 21,08 2.55Put (22.50) Nov 21,08 5
Disadvantage: Option Premium is too high.
2. Sell Call OptionOption Type Expiration
DateBid Price
Call (20.00) Dec 19,08 0.4BenefitEarn $160 (0.4*400) option premium
CostAdministration costAccount maintenance feeMargin requirementsRisks (potential margin call)Only share price on Dec 19,08 matters
3. Limit Sell at $20.40 good thru 12/19/08
Final Recommendation
Limit Sale at $20.40 good thru 12/19/08
The EndThank You!