Has Jack Henry & Associates Become 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%

9.0%

Fail

 

1-Year Revenue Growth > 12%

6.2%

Fail

Margins

Gross Margin > 35%

41.3%

Pass

 

Net Margin > 15%

15.1%

Pass

Balance Sheet

Debt to Equity < 50%

13.4%

Pass

 

Current Ratio > 1.3

1.17

Fail

Opportunities

Return on Equity > 15%

16.6%

Pass

Valuation

Normalized P/E < 20

23.14

Fail

Dividends

Current Yield > 2%

1.2%

Fail

 

5-Year Dividend Growth > 10%

12.9%

Pass

       
 

Total Score

 

5 out of 10

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

Since we looked at Jack Henry & Associates last year, the company has dropped a point, with sales growth slowing significantly. But investors certainly don't mind, as the stock has risen about 30% over the past year.

Jack Henry is the place where small banks and credit unions turn for help with their operations. From electronic funds transfer to transaction processing and remote deposit capturing, Jack Henry makes it easier for its client banks to serve its customers better, saving them from the hassle of developing their own in-house capability to get necessary functions done.

But Jack Henry isn't alone in serving those customers. Both Fiserv and Fidelity National Information Services (NYSE: FIS  ) are working hard to stay on the leading edge of financial services, with more emphasis on digital transactions and mobile-based banking systems.

For its 2012 fiscal year, which ended June 30, Jack Henry broke the $1 billion mark in revenue as profit rose 13% from the previous year. Electronic payment services had the strongest growth, supporting what we've seen in the highly competitive electronic wallet segment, where eBay's (Nasdaq: EBAY  ) PayPal is fighting with established card network giants Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) , among others, to give consumers a simple payment solution. Jack Henry's buyout of iPay Technologies a couple years ago gave it more exposure to online bill-paying, but if it could get its foot in the door with mobile payments, Jack Henry could have a real growth opportunity.

For Jack Henry to improve, it needs to find innovative ways to grow its business and keep trying to boost its dividend. If it can beat out the competition, Jack Henry could easily move closer to perfection in the future.

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 out the best investments from the rest.

Jack Henry & Associates may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Visa and eBay. 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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