Jack Henry & Associates (Nasdaq:JKHY) helps smaller banks perform mundane tasks, such as handling financial transactions through an array of software products and service support. One would think Jack Henry's business would be struggling in the face of volatile financial industry trends, but sales and profits continue to move steadily forward.

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Full-Year Recap
Revenues advanced 16% to $966.9 million. Support and service revenue jumped 18% and accounted for the bulk of the total top line at 86.1%. Management cited the processing of ATM, debit card and credit card transactions, bill payment, remote deposit capture and ACH transaction processing as the strongest categories that collectively reported 26% sales growth during the final quarter of the fiscal year. For the full year, the next-largest product category consisted of hardware sales, which fell 4% to account for 6.4% of total quarterly revenue. License sales accounted for the remainder of revenue and advanced a modest 2%.

Sales costs rose 15% to $567.6 million but lagged the top-line growth. Operating expenses also lagged sales growth, rising only 12% to $183 million. This more modest expense increase helped send operating income ahead by 19% to $216.3 million. Higher interest expense tempered net income growth to 17% as it reached $137.5 million. More shares outstanding reduced earnings a bit as well, but they still rose a very healthy 15.2% to $1.59 diluted EPS. Free cash flow came in at approximately $181 million, or $2.09 diluted EPS.

Outlook
Management didn't provide forward guidance but said, "We are cautiously optimistic that we will continue to see an improved economic environment over the next 12 months." For the coming year, analysts currently project sales growth of more than 7% and total revenue of just over $1.03 billion. They expect earnings of $1.56 per share.

The Bottom Line
Despite very challenging operating conditions in the banking industry, Jack Henry has managed to grow annual sales and earnings in the mid-single digits on average over the past three years. The just-completed year saw growth return to the double digits, which is still the annual average over the past decade.

Jack Henry's focus on smaller, local commercial banks and savings institutions has turned out to be an advantage. Its target market is institutions with less than $30 billion in assets and includes banks such as Old National Bancorp (NYSE:ONB) and German American Bancorp (Nasdaq:GABC). In contrast, larger rivals, such as Fiserv (Nasdaq:FISV) and Fidelity National Information Services (NYSE:FIS), have had to navigate consolidation and operating struggles from larger financial institutions.

Additionally, Jack Henry's product and service offerings are considered core banking functions. In other words, banks are likely to maintain the processing of transactions and systems support regardless of the economic climate. Its operations are also quite profitable, as evidenced by the recent net margin in excess of 14%. At a forward P/E of 16, the valuation is reasonable as long as long-term profit growth returns to the double digits. The trailing free cash flow multiple is even more reasonable at 13.3. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. See How To Pick A Stock.)

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