Is Jack Henry & Associates the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Jack Henry & Associates (Nasdaq: JKHY  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Jack Henry & Associates.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

10.4%

Fail

 

1-Year Revenue Growth > 12%

15.6%

Pass

Margins

Gross Margin > 35%

41.3%

Pass

 

Net Margin > 15%

14.2%

Fail

Balance Sheet

Debt to Equity < 50%

17.5%

Pass

 

Current Ratio > 1.3

0.93

Fail

Opportunities

Return on Equity > 15%

16.9%

Pass

Valuation

Normalized P/E < 20

19.84

Pass

Dividends

Current Yield > 2%

1.4%

Fail

 

5-Year Dividend Growth > 10%

14.9%

Pass

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With six points, Jack Henry & Associates puts in a pretty strong showing. The bank-support company may not be in the most popular industry lately, but its services are still highly in demand.

Jack Henry makes software and provides processing services to thousands of small and mid-sized banks around the country. By acting as an outsourcing agent for various banking operations such as online bill pay and electronic funds transfer, Jack Henry allows banks to avoid having to hire their own in-house staff to handle these mission-critical functions. In addition, the company sells turn-key hardware solutions, having worked with companies like IBM (NYSE: IBM  ) and Dell (Nasdaq: DELL  ) to provide servers and other hardware that's already compatible with Jack Henry's software products.

By focusing on small and mid-sized banks, Jack Henry has thus far avoided the worst of the financial crisis, as those banks tended to hold up somewhat better than their giant Wall Street counterparts. But the company has plenty of competition. Fiserv (Nasdaq: FISV  ) and Fidelity National Information Services (NYSE: FIS  ) also offer similar services to banks and credit unions.

Investors have to be impressed with Jack Henry's stable, steady growth. In its most recent quarter, the company beat analysts' earnings estimates, posting earnings per share that were 20% higher than those of the year-ago quarter. If the company can hold its own this well in a tough market, there's no reason to think it can't get even closer to perfection if the financial industry ever fully recovers.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add Jack Henry & Associates to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of IBM and Fiserv. Motley Fool newsletter services have recommended buying shares of Dell. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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