Jack Henry & Associates

We think Jack Henry's fiscal fourth-quarter results were solid, with adjusted revenue growth holding steady with recent results and management's guidance calling for this to continue into fiscal 2027.

Why it matters: Revenue in the fourth quarter increased 5% year over year, or 7% on an adjusted basis. Deconversion fees declined to $9 million from $20 million last year, which created some pressure on reported growth and margins. Full-year deconversion fees were up 26% year over year but remain below historical averages. This could create some upside if bank mergers and acquisitions starts to pick up. Adjusted operating margins declined to 21.1% from 23.2% last year, mainly due to higher personnel costs. Still, adjusted margins for the full year improved 90 basis points, and we think solid growth and the scalability of the business should allow for solid margin improvement over time.

The bottom line: We will maintain our $180 per share fair value estimate for the wide-moat company and see the shares as modestly undervalued. Over the course of fiscal 2026, Jack Henry repurchased $448 million of its own common stock (about 4% of the current market capitalization) at an average price of $152 per share. We view share repurchases as a good use of capital at the current market price and would like to see management stay aggressive on this front. Management's guidance calls for adjusted revenue growth in fiscal 2027 that is roughly in line with the level this year and for adjusted margins to be flat to slightly up. While there could be some headwinds to margins in the coming year, we note that Jack Henry has materially outperformed its initial margin guidance in the last three years.

Our fair value estimate for Jack Henry is $180 per share, which equates to 25.0 times our fiscal 2027 earnings estimate.

Growth slowed in fiscal 2021 due to the impact of the pandemic and then rebounded, leading to outsize growth in fiscal 2022. Growth more recently has remained somewhat depressed due to lower deconversion fees.

With deconversion fees rebounding, we expect Jack Henry’s growth to start to normalize and project a 7% revenue compound annual growth rate over the next five years, roughly in line with the company’s historical growth rate.

Margins dipped before the pandemic owing to spending in the payments segments. The company did see some recovery in margins starting in fiscal 2022, but margins have been somewhat volatile over the past few years due to deconversion fees.

However, in the long run, we think a rebound in deconversion fees, the inherent scalability of the business, and our expectations for relatively strong growth will allow Jack Henry to meaningfully improve margins over time.

We project operating margin to hit 26% by the end of our five-year projection period, compared with 25% in fiscal 2026. Excluding the impact of deconversion fees, we expect margins to improve at an average rate of almost 35 basis points over the next five years.

We use a cost of equity of 7.7% and a weighted average cost of capital of 7.6% in our valuation.

While we believe the competitive positions of the company’s segments differ, we believe Jack Henry deserves a Wide Morningstar Economic Moat Rating overall, based primarily on switching costs surrounding its core processing and complementary services, with scale benefits and the resulting cost advantage playing a supporting role.

Jack Henry’s foundational product is core processing systems, the most basic and mission-critical system for banks. This business is contained in the company’s core segment, which makes up about one-third of its revenue. Core processing is the nuts-and-bolts system that banks need to maintain their deposit and loan accounts and to post daily transactions. Given the integral nature of core processing to their operations, banks very rarely switch systems. Besides the potential for business interruptions, converting to a new system would require the banks to retrain their employees. Customers typically sign multiyear contracts, and customer retention approaches 99% annually, excluding customers lost because of acquisitions by another bank.

While Jack Henry is smaller than peers such as Fiserv and FIS, we believe its patient approach to growth has bolstered its moat. Fiserv and FIS are essentially roll-ups, and while building a leading position through M&A in an attractive industry is not a negative, it has left these companies with multiple acquired platforms that they must maintain or risk voiding their switching cost advantages. In contrast, Jack Henry has grown organically and has utilized acquisitions only sparingly. As a result, it has built unified platforms for banks and credit unions. Its slimmed-down product set allows it to focus its resources and maintain operating margins on par with its larger peers.

Over time, the product set of bank technology companies has widened significantly, as technology has come to play a greater role in banking operations. Jack Henry now has more than 140 complementary products for its bank customers and over 100 for its credit union clients. Revenue from these products is contained in the company’s complementary segment, which accounts for a little over one-fourth of revenue. On a stand-alone basis, we believe most of these products don’t benefit from the immense switching costs that surround core processing. However, we view this expansion as additive to the company’s moat, not dilutive. These products are a natural extension for Jack Henry, and cross-selling multiple products strengthens its client relationships. We believe the ability to offer a full suite of services increases overall switching costs, especially for small banks and credit unions, which are more likely to depend on a single bank technology provider.

Jack Henry also offers payment processing services, with the payments segment accounting for about one-third of revenue. Here, we think Jack Henry’s relatively smaller size is a bit of a negative, as payment processing of any type tends to be highly scalable. We believe that there are some switching costs for this side of the business, but scale and the resulting cost advantage are the dominant competitive factors. In this respect, we believe Jack Henry is at a bit of a disadvantage relative to its larger peers, and this is the firm's lowest-margin segment. Still, on an absolute basis, the economics appear to be attractive, suggesting this segment has enough scale to enjoy a moat, albeit not as wide as the rest of the company’s operations.

With solid margins and limited capital needs, Jack Henry consistently produces strong returns. Over the past five years, return on invested capital averaged 19%, well in excess of any reasonable estimate of the company’s cost of capital.

The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts.

An organic approach to growth has allowed Jack Henry to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins.

Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting that it is steadily taking share.

Jack Henry's smaller size could put it at a disadvantage on the payments side, an area that continues to grow more important.

Jack Henry’s limited M&A appetite and nominal debt load could be viewed as overly conservative.

Jack Henry’s bank technology operations are tied to a mature industry and are almost entirely domestic, limiting its growth prospects.