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Jack Henry Profits From the Big Business of Small Banks

Jack Henry & Associates Inc. (NASDAQ:JKHY) has built an impressive business niche as the leading provider of technology services designed for small-scale financial institutions.

While not a true value play, Jack Henry is still worthy of investors' attention. Certainly, anyone interested in stable companies with substantial long-term dividend growth potential should give this stock a look.


Building better banks

Jack Henry offers its more than 9,000 clients an expansive suite of services covering a wide array of technology solutions, both physical and digital:

  • Core solutions.
  • Retail delivery.
  • Online and mobile.
  • Imaging solutions.
  • JHA payment solutions.
  • Information security and risk management.
  • Business intelligence and financial performance.
  • Training and consulting.



Jack Henry's technology allows small banks to offer their customers a level of service comparable to that offered by the biggest national banks.

Chief among Jack Henry's "core solutions" is the SilverLake System, its flagship banking platform. The SilverLake platform offers an integrated, customizable toolset for hundreds of financial institutions:


"SilverLake System is a competitively distinct, extremely powerful banking platform that provides highly customizable, enterprise-wide automation designed for growth- and commercial-focused banks ranging from community banks to multi-billion, mid-tier institutions. Approximately 400 banks have entrusted their ability to attract, serve, and retain their customers to SilverLake including more than 20 percent of the domestic mid-tier banks with assets ranging from $1 billion to $30 billion. SilverLake can be installed in-house or implemented through JHA OutLink Processing Services, Jack Henry Banking's outsourced offering. Banks also have the option to fully customize the system to support their unique operational requirements or the system can be implemented for OutLink customers as an 'off-the-shelf' solution using an expedited and streamlined process. This bank-centric system effectively supports dynamic processing requirements by integrating robust core functionality with approximately 140 best-of-suite complementary products and services. SilverLake can also leverage existing technology investments with jXchange, a services-oriented architecture on a .NET platform that provides open connectivity between Jack Henry Banking's core and complementary products and third-party niche solutions."



Jack Henry also lists hundreds of individual services, giving clients the ability to choose the exact solutions they need. While too numerous to list in their entirety, certain key services deserve to be called out:

  • Payment processing solutions.
  • Customer relationship management software.
  • Specialized banking industry software.
  • Secured ATM cards.
  • Check scanners.
  • Employee and teller platforms.
  • Fraud prevention.
  • Automated loan risk assessment.



In essence, Jack Henry can provide virtually all of the digital and physical technology services that a bank could conceivably need, whether it is an established institution with billions of dollars in assets or a new bank just getting started.

As it moves deeper into the cloud, Jack Henry appears well positioned to continue expanding its client footprint, while locking them in to its services ecosystem.

Enviable earnings expansion

While Jack Henry's dizzying array of banking services, solutions and platforms may cause investors some confusion at first, there is no hiding the company's long streak of impressive financial performance. Indeed, both its top and bottom lines have enjoyed decades of consistent growth.

Jack Henry has seen revenue growth every year for the past 30 years. Remarkably, this record held even in the teeth of the Great Recession, when many banks, both large and small, found themselves under severe, even existential, threat.

While consistent revenue growth has been relatively slow and steady, lately ranging between 5% and 8% per year, earnings growth has proven more robust, consistently topping 10% over the past several years.

In 2016, the company posted $1.35 billion in revenue and $248.9 million in earnings. Last year, revenue reached $1.54 billion, while earnings expanded to $376.7 million. With trailing 12-month earnings of $290.4 million, Jack Henry continues to perform strongly.

With a dividend yield of just over 1%, it is clear Jack Henry cares about returning cash to shareholders, while still putting a premium on investing in its own growth. However, this dividend should gradually expand as the company continues to embed itself as an essential provider of core banking services. This will likely magnify as less capital-intensive cloud services grow to play an expanding role in Jack Henry's business.

Verdict

Jack Henry operates a high-quality business that is growing and protected by a distinct economic moat. However, it is hardly cheap and one might well argue that the stable, strong growth of the past several years has already been priced in to a degree. Still, we will be watching this story closely and consider dipping a toe in ere long.

Disclosure: No positions.

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This article first appeared on GuruFocus.