jack henry & associates presented november 11, 2008 yan huang shuang cheng guang lu chien-lung...

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!