A Payment Processor Trending Higher

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Jack Henry & Associates (NASDAQ: JKHY) is a provider of payment processing and technology solutions for banks and credit unions.  The stock has found its groove, enjoying a powerful rally triggered off the March 2009 low.  But what has probably gone unmentioned are the new multi-year highs the stock is enjoying, after surging past $30 earlier this year; a price which had capped a 11-year base all the way back to 2000/01.

<img src="http://media.ycharts.com/charts/49351ab01448e69027ed2a95392a52ab.png" />

JKHY data by YCharts

Earnings have come in at, or ahead of estimates for the past 8 quarters, with steady incremental improvements.   The recent quarter came in at $0.49 a share, ahead of the $0.42 reported last year and above estimates of $0.46.  The strong quarter was buttressed by the “reduced number of bank failures” that should stabilize as the economy slowly recovers.   There was good organic revenue growth, which was up 9% for the quarter.  Forward projections should be easier from here on out. 

The biggest earnings contributor was electronic payments; it accounted for 35% of revenue, and was up 15% quarter-over-quarter.  Data and item processing and maintenance fees saw a 9% and 7% sequential quarterly growth respectively, and together made up 45% of revenue contributions.  On the flip side, hardware revenue declined, but only accounts for 5% of revenue.  This is good news going forward, because the largest contributor to revenues is also its fastest growing one.   Guidance for revenue growth was described as "substantially a little lower"!   Analysts are looking for $272 million for next quarter, but based on the above growth the figure could be closer to $291 million. But given executive cautions, it may be better to aim for the former.

In addition, the tendrils of Hurricane Sandy also reached the company.  There will likely be a one-time charge against income as it had to relocate operations from its New Jersey processing center to one in Oklahoma City.  This impacted "over 100" of the 1,300 core clients. The move doesn't sound like something which can be easily swept under the carpet.  So while it may beat in revenues, it may come in under expectations on earnings-per-share.

The stock has a good dividend record, managing an increase every year, even during the depths of the financial crisis. The current yield of 1.2% isn't going to excite (in part because of the strong growth in its share price), but it fares well when compared to competitors.  Fiserv (NASDAQ: FISV) doesn't pay a dividend, while Fidelity National Information Services (NYSE: FIS) offer a higher yield of 2.4%, but earnings payments tend to be flat at $0.05 a quarter, with the occasional (big) exception.  

Fiserv recently reported its Q3 earnings, enough to see it enjoy a sharp move higher on nearly five times its regular trading volume.  In spite a $50 million drop in net income for the comparable quarter last year.  The company projects revenue growth of 4% to 6% for the full year, erring on the low side.  Although given the strong performance from its competitors, a 4% growth prediction may be a little conservative.  The company had seen a 5% growth in its Financial division (3% organic growth), but inconsistencies in the timing of licensing payments makes predictions difficult.   The company has added new clients in the form of Regions Bank and TB Bank, which are scheduled to go live in 2013.  But the addition of new clients is offset by the loss of Wachovia.

Fidelity National Information Services also recorded 5% organic earnings growth on recently reported earnings, although GAAP earnings-per-share results disappointed.  However, its Financial Solutions division enjoyed 7% growth, coming in ahead of the average, and a good marker for strength in this sector.  The company has placed greater emphasis on serving its financial sector by selling its healthcare business.  This should improve its overall organic growth and free resources to expand into more profitable areas.  International operations were a significant success with a reported 12% growth in Q3. The company highlighted its “significant expansion” for ATM Operations in India.  It has scaled strong growth from this over the next 3 to 4 years, layering on existing Indian operations.  Brazil was another rising star, generating 14% revenue growth.  North America saw robust sales, which the company expects to continue into Q4.  Reiterating the case the worst is now behind for the U.S. financial sector.

All three companies have enjoyed strong growth in their financial services divisions, as banks look to minimize costs by using outsourced solutions for payment processing and back-end support for banking services.  This trend looks set to continue, which should be a boom for these companies.  Indeed, there are opportunities elsewhere for similar companies serving different financial sectors.  The stabilization of the financial sector has no doubt helped in terms of expectations going forward, with fewer bank closures minimizing the risks for lost clients.  

fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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