In my continuing research into companies like Online Resources
Why does the name sound so familiar? And why did I take an immediate liking to this company, whose name I had never heard before beginning this project? Well, it just came to me: The name closely resembles that of my very favorite Johnny Cash ballad, John Henry.
Like the song says, John Henry was a steel-driving man. He drove spikes, digging holes for dynamite blasting back when the nation's railroads were being constructed in the mid-19th century. For his labors, he earned a wage of "a nickel a day for every inch" he could drive the spike. Fortunately for its shareholders, John Henry's modern day namesake, Jack Henry, is a much more profitable operation -- and one that's found a way to earn handsome profits without breaking a sweat.
The company just closed out its 2005 fiscal year and reported its earnings results yesterday. Over the past year, Jack Henry grew its revenues by 15% over its fiscal 2004 numbers. That's healthy growth in and of itself, but the story gets even better from there: Gross profits increased by 18%, profits per diluted share grew by 19%, and operating and net profits both leapt 21%.
Key to the firm's rising profitability over the past year has been powerful growth in its highest-margin segment, license revenue, which doubled the pace of overall revenue growth at 32%. Even though license revenue makes up just 15% of Jack Henry's overall sales, it has a disproportionate impact on overall profitability. This is because licensed revenue comes with a 94% gross margin and is roughly three times as profitable as the company's other two segments: hardware sales and services.
Like the Man in Black said, "You go, hammer swinger."
Kudos for its business performance aside, however, Jack Henry does pose one problem for Foolish investors: its valuation. With its clean balance sheet and limited amount of debt, Jack Henry is tailor-made for evaluating with a simple enterprise value-to-free cash flow ratio. With its enterprise value of $1.76 billion and $42.5 million in free cash flow, Jack Henry's EV/FCF ratio stands at 41.
Considering that analysts expect the company to grow at no more than 17% annually over the long term, that's too rich for this Fool -- but I'll bet Jack's pappy is proud that he's done so well.