Few corners of the business world haven't been deeply affected by the coronavirus crisis, but banking services provider Jack Henry & Associates (NASDAQ:JKHY) is a rare exception that has held up well. As of this writing, the fintech company's stock remains less than 3% below its all-time high and is up 16% year to date, compared with a 15% decline for the S&P 500.
In fact, Jack Henry has been one of the best-performing fintech stocks in the years since the financial crisis of 2008 and 2009. It's certainly not a "buy low" type of investment at this point, but there are good reasons shares are flying high -- as well as reasons it could continue to do so in the decade ahead.
A picks-and-shovels business for the modern banking industry
Technology has crept into every corner of our lives, and as a result, consumers' expectations have grown. We now demand companies deliver their services conveniently and securely to us everywhere -- at home or on the go, as well as at places of business. And for new companies, building out the capabilities to meet those demands is far easier than for established businesses.
Take banking for example. It's a very old and slow-to-change industry -- and for good reason, given both the sensitive nature of money matters and the heavy regulation involved. Nevertheless, it too is adapting to the digital age. And that's where Jack Henry & Associates comes into the picture.
While the vast majority of banking customers have never heard of Jack Henry, it's one of those firms that many make use of on a daily basis without knowing it. The technologist does no banking itself -- it offers banks the tools they require to provide the modern services their customers want. The company claims some 9,000 clients, ranging from small local banks and credit unions to regional banks to large non-bank institutions.
That's an extensive list of customers, but Jack Henry's growth is far from over. During the final quarter of 2019 (which was the company's fiscal 2020 second quarter), revenue increased 9% year over year to $419 million, while earnings per share rose 7% to $0.94. The company continues to announce new and expanded partnerships at a steady clip as banks look to increase customer engagement via apps, move operations to the cloud, and improve back-office systems and money management. Jack Henry continues to add new features to its platform as the war on cash compels businesses to adopt newer digital payment systems and access faster money transfer capabilities.
Not cheap, but for a reason
The banking sector is traditionally not a great place to be when turmoil breaks out. Banks are sensitive to business activity, and periods of lower economic growth -- or worse, a contraction like the one we now appear to be in the midst of -- usually cause a decrease in banking activity.
So what gives with Jack Henry stock's outperformance? After all, owning a stock that trades for a high premium of 46 times trailing 12-month earnings and growing its bottom line at just a mid-single-digit pace headed into a recession should be a recipe for disaster.
At this point, it looks like the market is betting that Jack Henry will see an uptick in activity. After all, with so many people largely confined at home -- due to shelter-in-place orders, work-from-home policies, loss of employment, social-distancing precautions, etc. -- traditional in-person banking has just been tossed out the window. Never before has digital access to money management and payment systems been so important.
Add to that the fact that Jack Henry entered 2020 with no debt and $72.5 million in cash and equivalents on the books. The firm is in good shape to weather this storm, even if it suffers some short-term disruptions.
Given the high premium shares are trading for at the moment, I don't plan on making a purchase until after I see the company's business update for the first quarter of calendar 2020, which is due out in late April. But for investors who expect technology will remain the primary mover and shaker in the economy for the foreseeable future, including in the banking and finance sector, Jack Henry at the very least deserves some attention.