Top Picks 2016: Jack Henry & Associates

01/26/2016 7:00 am EST

Focus: STOCKS

Peter Mantas

CIO, Logos LP

This Top Pick fits the bill for a conservative or income-oriented play for the long-term investor; the company provides IT solutions for the regional banking, insurance, and financial services market and enjoys a near monopoly on its services, suggests value investor Peter Mantas of Logos LP.

Little known Jack Henry & Associates (JKHY) has excellent valuation metrics that make it the envy of not only IT companies in general but of all companies on the S&P 500 (SPX).

Free cash flow as a percentage of sales is over 21%, which put them in the cash generating capabilities of an Oracle (ORCL) or Microsoft (MSFT).

The company sports very high margins (25.60% operating versus 16.96% net) well above its industry average which, no doubt, provide it with greater FCF conversion than the rest of the market.

In addition, JKHY exhibits strong ROE and ROC (22.75% and 110.75%, respectively) while increasing FCF by 50% over the last three years.

Revenue has grown roughly 30% over the last three years, while the company's Forward Rate of Return is a little over 14%.

Despite these excellent operating metrics leading to a very stable business model, the real story for JKHY is greater than expected growth in its solutions due to being a direct beneficiary in the regional banking space for 2016.

Our research suggests strong regional banking performance in 2016 leading to an increase in legacy solutions spending over the next few years.

Although we expect a slower growth environment for JKHY over the next few years, IT solution development has been transforming at a rapid pace and we expect this trend to continue until 2020.

Thus, there is no reason why the company won't hit double a digit market cap over that time frame.

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