JACK HENRY & ASSOCIATES INC (JKHY) stock intrinsic value fair value estimate & owner earnings analysis

Jack Henry sells the core software and processing that community and regional banks and credit unions run on, plus payments, digital banking, security and other products around that core. Its fiscal 2026 annual report (year ended June 30, 2026) lists over 900 core bank clients, over 700 core credit union clients (on its Symitar platform) and about 5,600 further clients that buy individual products. Revenue was $2.54 billion, up 7.1%: Core grew 4.8%, Payments 7.2% and Complementary 8.3%. About $43 million of revenue was early-termination fees from clients that left (up from $34 million), so growth without those fees was about 6.8%. Contracted future revenue stood at $8.44 billion, about 23% of it due within twelve months. Its core competitors are Fidelity National Information Services, Fiserv, Corelation and Finastra. What we measured. Owner earnings are the cash the business generates after paying for everything it has to reinvest. Jack Henry reinvests heavily: it capitalized about $184 million of software development in fiscal 2026, and total capital spending was $255 million (about 10% of revenue). We treated essentially all of it as a real cost of staying in business, excluding only a small slice that scales with revenue growth. We also deducted stock compensation ($32 million) and kept in the cost the $86 million net build in capitalized contract costs (commissions and client conversion costs), because winning contracts is a recurring expense. Year-to-year swings in receivables, payables, accruals, taxes and deferred revenue were removed. The filings do not break the contract-cost line down further, so we kept the full reported figure as a cost. Owner earnings per diluted share: fiscal 2022 $4.32, 2023 $2.72, 2024 $3.43, 2025 $5.38, 2026 $7.23 as reported. Two years are not typical. Fiscal 2023 was depressed by a large cash tax bill under the earlier rule that forced R&D to be deducted over several years, plus a $112 million build in contract costs, so we left it out of the starting level. Fiscal 2026 includes about $126 million (about $1.75 per share) of one-time cash tax relief from the 2025 tax law, which let the company deduct R&D it had previously capitalized: cash taxes paid were $39 million against a $150 million tax charge. Without that, fiscal 2026 was about $5.48 per share, 1.8% above fiscal 2025. That 1.8% is the actual trailing growth rate, and the base case does not assume faster growth in its first year. Adding back the small interest cost ($4.6 million paid) gives about $5.54 of business cash flow per share for 2026. The starting level for all of the base case is $4.93, the middle of fiscal 2022, 2024, 2025 and normalized 2026, which is below the last two years because fiscal 2024 showed the figure can fall to $3.65 when contract-cost and tax drains coincide. Base case, $86.02 per share. The business is worth about $86.58 per share before debt; it owes about $0.56 per share ($40 million drawn on its revolving credit line at June 30, 2026, with cash of $12 million treated as working cash); the difference is $86.02. Business cash flow grows 1.8% in the first year, 4% a year for the next four years, 3% a year through year ten, then holds flat through year thirty and is worth nothing after that. The growth is in the bag because revenue grew every year from fiscal 2017 to 2026 at about 7% a year, almost all from the existing business and not from acquisitions, and because much of it comes from contracted, recurring revenue. We credited only about half to two-thirds of that pace, because capital spending and contract costs keep absorbing a similar share of each new revenue dollar. Left out: new products such as the embedded-payments business bought with Victor Technologies on September 30, 2025 ($42.4 million), share gains, any margin improvement, and any benefit from buying back shares. Bear case, $49.12 per share. The business is worth about $49.68 per share; it owes $0.56; the difference is $49.12. The downturn we use is the 2008-2009 credit crisis: in fiscal 2009 the company's revenue was flat ($745.6 million versus $742.9 million) and net income slipped 1% ($103.1 million versus $104.2 million), according to its year-end results announcement. Today's cost growth is higher (cost of revenue up 5.4%, selling and administrative up 5.7% and research up 8.4% in fiscal 2026). If revenue stalls for two years and costs still rise about 2% a year, roughly 1.7 points of a margin of about 15.5% disappears each year, so owner earnings fall about 11% in each of years two and three, after a flat first year. They then stay flat through year ten and shrink 3% a year in years eleven to thirty, matching the roughly 3% a year decline in the number of credit unions from 2020 to 2025 and the 55% rise in bank merger transactions in 2025, after which nothing is assumed. The company's own record supports a hard stretch: from fiscal 2017 to 2019 owner earnings per share slipped from $2.88 to $2.79 while revenue grew about 12%. Bull case, $111.15 per share. The business is worth about $111.71 per share; it owes $0.56; the difference is $111.15. It starts at $5.54, the level reached in both fiscal 2025 and normalized fiscal 2026, grows 6% a year for five years (close to the 6.8% growth in fiscal 2026 revenue excluding termination fees) and 4% a year for the next five, then holds flat through year thirty. Debt. The $40 million balance is small next to roughly $395 million of normalized annual owner earnings. In fiscal 2026 the company replaced a $600 million credit line expiring August 31, 2027 with a $1.0 billion line expiring March 25, 2031, so no maturity bears on any case. Interest paid fell to $4.6 million. Checks on the case. We tested the starting level: if the lasting level were fiscal 2024's $3.65 instead of $4.93, the base case would be about $63; with no growth at all the base case would be about $67. We found no significant legal proceedings beyond routine claims. Figures from earlier analyses were built on a different basis and are not comparable. Margin-of-safety price, $46. We are fairly sure of the earnings level: fiscal 2025 and normalized fiscal 2026 agree within 1% at about $395 million, but the annual contract-cost build has ranged from $51 million to $116 million over five years and the tax treatment has swung, so any single year can mislead. The worst plausible outcome is a banking downturn combined with continued client consolidation and competitors taking large core clients; a serious security or outage failure at the core processing platform is not modeled. The business would survive any of these: debt is $40 million, clients number in the thousands, and $8.4 billion of revenue is already contracted. If we are wrong about the sustainable level or growth, the base case falls to $63-67 and the bear case is $49. The price assumes a holding period of about five years, during which the company pays a dividend of $0.61 per quarter ($2.44 a year); it spent $448 million repurchasing shares in fiscal 2026. At $46, our starting-level cash earnings of $4.93 per share are about 10.7% of the price and the dividend is about 5.3%; on the base path that cash plus growth and the value of what remains after five years implies about a 21% annual return, while the bear path implies about 7%. At a materially higher price the base path falls short of 20%.