Judging Jack Henry (JKHY): a Shorty

 

 - Shorties are a new type of post for me that consist primarily of a table comparing several SSGs on the same company.  They contain minimal discussion and take less time to create, but still take forever to respace and reformat as WordPress remains way, way table unfriendly.

 

- As usual, I’m most interested in understanding and analyzing SSG judgments.  After the table, I evaluate the most important judgment in this chaotic market, the Forecast Low Price by four SSGs.  According to the BI-NAIC Stock Selection Handbook (page 108), the SSG’s Low Price is an estimate of how low the stock price might drop in the next five years. [my emphasis]

 

- The stock I’m analyzing is Jack Henry & Associates (JKHY) which provides data processing software and services to banks and other financial institutions.  It currently ranks #137 on “The Best 200 Small Companies” for 2008 by Forbes magazine.

 

 

Jack Henry (JKHY)	KimB from  BI’s First Cut	ArminF	AnnC from BI’s First Cut	Take           Stock
Date	9-2-08	9-14-08	10-17-08	10-22-08
Data	S&P	S&P	S&P	Hemscott
Price	$20.04	$21.04	$17.30	$17.80
52 week High & Low Price	$29.24 &           $19.50	$29.24 &        $19.02	$29.24 &        $14.76	n/a
Project Growth From	unknown	Last Q	Last Q	unknown
Sales Growth	11.00%        (from 2008)	13.00%	09.00%             (B)	11.10%
EPS Growth	11.00%            (same as EPS)	10.00%     (A)	08.80%             (C)	04.60%
High PE	21.5	23.5	20.0	26.3
High EPS	$1.92	$1.88	$1.80	$1.49
High Price	$41.30	$44.20	$36.00	$39.23
Value Line Estimated High Price = $30-50 on 8-22-08 when JKHY’s recent price was $24.15
Low PE	13.8	15.3	11.0	16.7
Low EPS	$1.17	$1.17	$1.17	$1.17
Low Price	$16.10             (Low PE x         Low EPS)	$13.31           (70% < 52     week low)	$12.90              (Low PE x         Low EPS)	$19.54           (Low PE x       Low EPS)
Upside/Down-side Ratio	5.4	3.0	4.3	impossible to calculate
Total Return	16.6%	17.0%	16.9%	18.7%
SSG Buy Under	n/a	$21.03	n/a	$21.04
RV/PRV	74.3 & 67.1       (no outs)	84.5 & 76.8    (2004 out)	69.5 & 63.7        (2004 out)	n/a
Quality	n/a	S&P = A+	n/a	TS = 2.6,       unacceptable
PTPM – 5 yr ave	22.1%              trend up	22.7%           trend down	22.7%              trend down	22.7%            trend n/a
ROE – 5 yr ave,   End Equity	14.7%              trend up	15.4%           trend up	15.4%              trend up	n/a
ROE – 5yr ave,    Start Equity	n/a	17.1%           trend even	n/a	17.1&            trend n/a
Debt to Equity –   5 yr ave	n/a	-0-               trend even	n/a	n/a

 

DISCUSSION:

 

- The Forecast Low Price is the single-most important SSG judgment during these crazy market times:  

 

** When JKHY was selling for $21.04, I used $13.31 for my Forecast Low Price, 70% below its 52-week low which is a really low method for me, but its current price has dropped to $15.40 in little more than a month and my SSG’s Low Price no longer seems low enough; 

 

** Ann used Low PE x Low EPS which is the preferred Low Price method for growth companies as it assumes no growth.  However, Ann did not explain why she used 11.0 for her Low PE as 15.3 was the lowest in the last 5 years;

 

** JKHY’s current price, in less than two months, has already fallen below Kim’s Low Price of $16.10;

 

** Take Stock’s $19.54 Low Price made no sense when its SSG was completed as it was higher than JKHY’s current price at that time and that is a SSG no-no.  TS does not follow all the SSG rules and I think that is a

big mistake!  

 

(A) I rechecked the analysts on 10-23 and they were averaging 11.8% with S&P and FactSet Call Street via CNN Money high at 15.00% and Reuters via Morningstar low at 13.30%.  Value Line was 13.50%, First Call via Yahoo was 13.57%, and Zacks was 13.83%.  JKHY’s EPS growth was 15.3% for the last five years, 10.4% for the last three, 2.6% for the last two, and its Sustainable Growth rate is 13.0%.  I don’t remember why I selected 10.00% for my SSG, but it’s clear that the company’s EPS growth has been declining.

 

(B) Ann’s 9.00% Sales growth is not explained which is key to her Preferred Procedure; Zacks estimated 12.82% Sales growth for the next 5 years.  If Ann had used 11.0% Sales Growth, and changed nothing else, her PP would have been 10.8% (instead of 8.8%).

 

(C) Ann’s 8.8% EPS growth comes from her PP with 3 overrides (22.7% PTPM, 36.2% Tax, and 86.4 M shares).  Her PP would have resulted in 10.9% EPS if she had only used the last three-year ave for PTPM (23.3 instead of her 22.7).

 

 

- Armin

 

 

 

 

Two Small Company Stocks: Cognizant Technology Solutions (CTSH) and Jack Henry and Associates (JKHY)

It’s difficult to find good small company stocks that are reasonably priced. One source for leads is Forbes magazine which lists the 200 best small company stocks every year. Small is defined as Sales between $5M and $750M. Companies must also have a net profit margin greater than 5% and a share price greater than $5.00 to make the list. See: http://www.forbes.com/200best

I’ve followed several of these stocks for awhile, two of which are: Cognizant Technology Solutions (CTSH) and Jack Henry and Associates (JKHY). JKHY was also singled-out as part of Forbes’ 14 favorites to buy now [all 14 are listed below]. http://www.forbes.com/free_forbes/2005/1031/171.html

Cognizant Technology

CTSH was #1 of 200 last year (2004) and #2 this year with 4 consecutive years on the list. Cognizant provides custom IT consulting and technology services as well as outsourcing services to companies located in North America, Europe and Asia. CTSH tailors its services to specific industries with IT development centers in India.

Cognizant has been growing like a rocket ship. The current Value Line report (8-25-06) says it has averaged 48.5% EPS growth for the past 5 years and VL is estimating 30.0% EPS growth for the next 3-5 years. Many NAIC gurus think that projecting more than 20% is unsustainable and therefore unwise. That guidance doesn’t seem to fit CTSH….although I am uneasy projecting much more than 20% for the next 5 years, for sure without a lot more research.

As an illustration, I used VL’s estimate of 30% future EPS and a projected High PE of 45.9 based on eliminating 2003, 2004 & 2005 from the historical average PE as atypical outliers. I got a Forecast High Price in the next 5 years of $218.00 which is a whopping $108.00 per share or 98% greater than VL’s estimated High Price of $75-110. I NEVER want to exceed VL by such a humungous amount, even if I have a good reason which I don’t have.

This suggests that CTSH is overvalued, that investors have bid the share price of this high growth company way, way up….by paying any price, but not a reasonable price.

When I project 26% EPS growth (34.18% estimate from Reuters.com less one Standard Deviation of 8.20% which the website provides), I get a Forecast High Price of $186.80 which is still $76.80 per share or 70% greater than VL’s estimate of $75-110. The one Standard Deviation of 8.20% indicates wide variation among the 14 analysts and my reducing the Reuters estimate helps reduce the risk of missing their consensus estimate. However, now CTSH has a Reward/Risk or Upside/Downside Ratio of 2.8 which does not satisfy the SSG reasonable price criteria of 3.0.

Moreover, VL’s prior 5-26-06 report observed that “CTSH has been a favorite of momentum investors, which is evident in the score for Price Growth Persistence” and which was then and currently is 100%. I’m not a momentum investor and I’ll pass on CTSH. One of several reasons is that the current Value Line estimates CTSH’s PE will fall by nearly 40% in the next 3-5 years as its growth slows.

On September 1, 2006, Cognizant was selling for $70.03 per share.

Jack Henry

JKHY was # 99 last year and # 164 this year with 6 consecutive years on the Forbes list. Jack Henry provides integrated computer systems for in-house data processing to banks and other financial institutions. It also installs software, performs data conversion, customizes its software, and provides customer support services.

Jack Henry’s EPS grew 13.5% for the last 5 years and VL is estimating 15.0% for the next 3-5 years. When I use VL’s estimate of 15.0% future EPS and a projected High PE of 27.2 (2005 eliminated as an outlier), I got a Forecast High Price of $52.50 which was slightly under VL’s estimated High Price of $35-55.

I also used $15.40 as my Forecast Low Price which was the lowest option among my software’s four choices. These judgments resulted in a 8.9 Risk/Reward or Upside/Downside Ratio and a 23.2% Total Return which easily satisfy the SSG reasonable price criteria.

If I use 22.5 as my High PE (1.5 times my 15% EPS growth rate), I get a 3.2 U/D and a 18.9% TR which still satisfy the SSG reasonable price criteria.

JKHY’s Pre-Tax Profit Margin has been an average of 22.1% for the past five years and is trending even; Return on Equity has been 16.1% for the same period and is trending down. Fiscal year 2006 data has been reported, but is not yet available from the S&P data service that I use. It will be interesting to see what happens to these trends when 2006 data is made available.

There are other issues to consider before deciding to buy any stock, but at least Jack Henry looks like it is selling at a reasonable price (unlike Cognizant). JKHY, however, had revenues of $535.9M in 2005 which satisfies Forbes definition of small company, but does not satisfy NAIC’s which is revenues under $500M.

On September 1, 2006, Jack Henry was selling for $19.17 per share.

armin

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Forbes’ fourteen favorites are, along with their rank in the 200 list: Advisory Board, #7; Corporate Executive Board, #30; Jack Henry & Associates, #164; FactSet Research Systems, #53; Hydril, #52; Kronos, #125; Mobil Mini, #169; Navigant Consulting, #28; Resmed, #51; Resources Connection, #11; Talx, $158; Waste Connections, #32; and Yankee Candle, #32 (Forbes’ goof).