EUR 850.00 For Business Accounts Only

Morningstar | Jack Henry's Investments Will Lead to Greater Efficiency Than Peers

We think Jack Henry's historical focus on internal investment has benefited the bottom line, resulting in faster revenue growth. Most recently, the company has been able to achieve high-single-digit growth in revenue whereas its peers have seen slowing growth. Also, it appears to us that Jack Henry is stealing core banking software customers from rivals. We believe this is an exceptional development, given the impressively high switching costs banks encounter when changing their core processing provider. Though we think Jack Henry stands to benefit from growing profits at community banks, we are becoming increasingly concerned about what impact a rising rate environment will have on margins for smaller financial institutions. It is plausible to us that rising rates will mostly benefit larger banks with national scale while crimping margins at smaller lenders. It is our concern that rising rates may reveal a significant gap in funding costs between large and small banks. Should the gap in funding costs widen between community and national banks, it is likely that Jack Henry's core customer set would see greater M&A activity, resulting in client losses and lower demand for ancillary services. Thus far, community bank funding has resisted higher interest rates, but this is a risk we continue to monitor. We anticipate that Jack Henry will maintain its comparatively higher rate of capital spending. We credit this investment with creating new products, which is why Jack Henry has been able to maintain its impressive but still sustainable growth rate. Historically, its capital spending was in the upper single digits as a percentage of revenue. In fiscal 2017, capital expenditures exceeded 10% of sales. While we expect capital spending rates to decline slightly, we do believe migrating clients to fully outsourced services is more capital-intensive and will require investments in data centers and additional IT professionals.