Forbes Stock of the Week -
STOCK OF THE WEEK - JANUARY 23, 2006
Jack Henry & Associates (nasdaq: JKHY)
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Kelley Wright, editor of Investment Quality Trends, recommends buying data processing and management information specialist Jack Henry & Associates (JKHY).
The Monett, Missouri-based company develops and installs software, primarily for financial institutions, to manage their back office operations. Henry runs its software applications on hardware from IBM, with which it has had a relationship since Jack Henry founded the company in 1976. Henry also resells hardware from NCR, Dell, and Unisys.
For the four financial quarters ended September 30, 2005, Henry earned $78.25 million on sales of $548.75 and produced $128.5 million in operating cash flow. The company has no debt and a market capitalization of $1.9 billion.
Henry releases earnings for the December quarter on February 1, and the consensus estimate of 11 analysts is for $0.23 per share, a 21% rise over the year-ago quarter. For the full year (ending June 2006), analysts look for Jack Henry to earn $0.96 per share, up 18.5% from 2005 earnings per share of $0.81.
Shares are flat over the past 12 months, but have advanced 35% off of their 52-week low of $15.35. Based on Friday’s close of $20.82, the company trades for 21.7 times this year’s expected earnings, slightly above a market multiple.
The stock is priced a bit more modestly in terms of its projected five-year growth rate of 18%, giving it a price-earnings growth (PEG) ratio of 1.09. That growth rate is 50% higher than the average for the business software and services industry, and its PEG ratio compares favorably to the industry’s 1.6 average.
Wright evaluates the attractiveness of stocks based on dividend yield, focusing on those shares with yields that are high compared to historical averages and which correspond to periods of “undervalue.” Jack Henry currently pays an annual dividend of $0.18 per share, for a yield of 8.6%. The company has historically been overvalued when yielding 3.0%, which equates to a share price of $60, suggesting an upside of 188%.
"The recent acquisition of competitor ProfitStar is expected to add $6 million to $8 million in annual revenues and has rekindled investor interest,” says Wright. He is also encouraged by the company’s “A+” quality rating from Standard & Poor’s, as well as its modest 21% payout ratio, suggesting it will easily be able to maintain or raise its dividend in the future.
“Investors purchasing at current levels should be richly rewarded in the coming months and years,” says Wright .
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