What’s the “Financial App” That Lets you “skim money from millions of banking transactions?”

Sleuthing out Braden Copeland's teaser pick for Building Wealth

By Travis Johnson, Stock Gumshoe, October 2, 2014

Braden Copeland used to work for Porter Stansberry, co-editing his Stansberry’s Investment Advisory and working on Inside Strategist (since shuttered) that picked stocks based on insider buying. Earlier this year, he moved down the street to a different Agora-affiliated office to work for Bill Bonner’s son, Will, at Bonner & Partners and launch a newsletter called Building Wealth.

I’ve found some of Copeland’s teased ideas interesting over the years, though it’s been a while since we covered him, so I thought I’d check out this new “Financial App” stock he’s teasing today for Building Wealth. What’s he talking about?

Here’s how Will Bonner introduces the ad:

“Imagine if you had an ‘app’ on your phone that lets you collect money from every banking transaction in America… that skims money for you on auto-pilot”

So that sounds pretty appealing, right? If you’re super lazy like I am, there’s almost nothing better than this kind of “skim off the top” business — a transaction processor, or a royalty owner, or a rent collector. These kinds of businesses are often expensive, but they can sometimes grow cash flow without having to make big capital investments — which is pretty much the holy grail for long-term investors.

What does Braden say about it? Here’s the beginning of the ad:

“New Finance ‘App’ Skims Money from Millions of Banking Transactions… Legally!

“Last year this unknown software ‘app’ skimmed more than $400 million from payments and transfers by commercial banks and credit unions.

“Here’s how you could use this ‘app’ to collect thousands of dollars like clockwork!”

So I’m on the hook. I’m not going to jump up and subscribe just to learn the name of the “secret” stock, but I sure want to know what it is… so let’s dig into the clues and get an answer for you (and me).

(Just to reiterate something I say over and over: Learning about a secret “teaser” stock is a horrible reason to subscribe to any newsletter, despite the fact that it works so well for so many publishers — if you do this you’ll then be starting off with a huge bias about that stock, if you pay for a newsletter just to learn the name and ticker you’re dramatically increasing your tendency to think that stock is awesome because your brain is busy justifying your newsletter purchase (post-purchase rationalization, psychologists call it — like when you check home prices in your neighborhood after buying a house so you can congratulate yourself on the good deal you made)… and you’ll also (subconsciously) forever anchor your opinion of that stock on whatever Copeland says to at least some degree. So if you like Copeland or this idea, and you might, feel free to subscribe to his newsletter… but let us tell you the name of the stock and give you a chance to think about it a little bit first).

Here’s what he says to get us intrigued about this stock:

“This ‘app’ exists. And it’s 100% legal.

“It also generates more than $30 million per month….

The Ultimate Hidden Toll Collector

“I’m sure you know how bankers charge their customers fees for transactions… ATM withdrawals… money transfers… paying bills… etc.

“You pay these fees all the time.

“But the bankers have to pay fees too.

“And they pay them in order to keep the powerful, specialized software and computer systems that run their businesses working.

“These electronic systems are the behind-the-scenes guts of banking today.”

Ah, so we can start reading between the lines now — he’s talking about one of the companies that provides software and systems to banks. There are a half-dozen or so of these companies that are fairly big and publicly traded, I think, so let’s get some more clues to see which ones he’s talking about… and no, it’s not actually an “app” (though the company undoubtedly sells mobile banking apps, too)

“… this company is the ‘app’ I’m talking about. It’s at the center of hundreds of millions of dollars in transaction fees every month….

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“Part of what the ‘app’ does is to provide services to mobile banking users. The more people using mobile banking, the more profits the ‘app’ can make….”

Come on now, we’re going to need some more specific clues! Here’s a bit:

“You simply buy shares in the software company that owns the “app”… and let them pay you a portion of what they skim through their generous dividend.

“By my calculation this company’s stock is very underpriced compared to how much you could make from the banking royalties.

“The company has been around for more than 30 years with an impressive track record.

“And to be clear, I’m not talking about a company you’ve heard of, like Visa, MasterCard or American Express.”

OK, that’s pretty good. And we’re told that the company has raised its dividend every year for 14 years, which is compelling… and that they raised the dividend by 50% last year, which is even better.

More details?

“It’s one of the founding software providers to the banking industry – particularly credit unions….

“And this company is the undisputed leader in processing transactions for credit unions.

“They count more than 11,900 banks as clients…

“Last year, they made more than a billion dollars in profit – and their revenues increased nearly 10% from the year before.

“90% of those profits came from their cut of financial transactions.”

We’re also told that Copeland flagged the stock because of insider buying on March 7, and that it’s a company with a $4.7 billion market cap. So that’s probably enough.

But then he gets into what is really the heart of the argument — the “skimming payments” bit, so we should include a touch of that:

“A ‘Hidden’ Revenue Stream Is Bringing in Extraordinary Profits

“This company’s revenue from collecting fees from processing bank payments has surged 600%!” [in a decade]

“And because there’s virtually zero new overhead required for this, most of these profits go straight to the bottom line.”

He also makes a technical argument in favor of the shares, implying that the fact that it’s soon going to be re-testing $60 as it moves up (after hitting $60 and falling back to the mid-$50s) means it could soon “break out” again (like it did after a similar chart pattern a couple years ago), so he predicts a quick 25% gain in the next few months.

And a couple more words to convey his enthusiasm:

“More than 90% of their revenue is recurring… and growing yearly at a 10% clip.

“I think this is a must-own investment for the foreseeable future.”

So … what’s he talking about? This is, sez the Mighty Mighty Thinkolator, Jack Henry & Associates (JKHY).

Which has indeed been an established software and services provider to banks, mostly smaller banks, for almost 40 years — they were started by Jack Henry, writing software on a borrowed computer in a garage like most Silicon Valley stories, but this story happened to stay pretty “small town” even after going public in the 1980s, partly because it was born in the Ozarks in Monett, Missouri and remains centered there and, at least in their public image, it remains very focused on employee-friendly and customer-friendly policies (and the CEO, who is just retiring, started work there just out of high school as a classmate of Jack Henry’s son).

There’s a lot to like about this business — it’s a software and service business, so they have a high rate of recurring revenue and the switching costs are high, banks don’t want to switch software and retrain everyone every year. They used to also sell equipment, but they’re not so much in that business anymore (it’s still a small part), but growth is in bank outsourcing of all kinds of work (including check processing, call centers, etc.) and in the value-added and bolt-on services like payments processing, online banking software and tons of other behind-the-scenes software and analytics packages that banks can buy or use.

It’s not cheap relative to the broader market, but it is pretty comparably priced to larger companies that compete with them in many areas, like Fidelity National (FIS) or Fiserv (FISV), all of which are in the 20s for a trailing PE and the high teens for a forward PE (JKHY has a forward PE on estimates of about 19, trailing PE of 23). FISV is probably the most direct competitor, and it’s far larger with a market cap around $16 billion — FISV does not pay a dividend and they carry about $4 billion in net debt, JKHY has a cleaner balance sheet (no net debt) and has paid that consistently rising dividend, so that’s a tick mark in their favor. Though don’t get too hung up on that 50% dividend hike, that was in 2013 and the latest dividend increase was “only” 10% — the current yield is only about 1.5%, so dividend growth is arguably a more important metric than current yield.

The company has been quite shareholder-friendly — in the last fiscal year they generate about $340 million in operating cash flow and used $240 million of it to the pretty direct benefit of shareholders, $70 million for the dividend and another $170 million in share buybacks. And they have been growing rapidly as smaller banks and credit unions have recovered from the financial crisis and spent on “catching up” with the big banks on things like online banking and mobile banking and upgraded systems — I don’t know whether or not that growth continues, but they have had a very good couple of years. They are also pretty active acquirers, mostly of small bolt-on software providers whose products they can add to their systems.

There are quite a few other companies in the banking services/technology/mobile banking space, including payment handlers like ACIW and online and mobile banking firms like Q2 and Monitise, but I’d think that running the core systems of a bank gives Jack Henry (or FISV) a big advantage over the many companies who provide one or two services — the integration can be much stronger and easier (and, perhaps, less scary) if everything’s run by the same company. I remember looking at Q2 Holdings (QTWO) when they came public a year or so ago, and it’s just hard to see them becoming a substantial or profitable player — they have a cool looking website and probably a cleaner and more appealing online banking platform, but the big megabanks can (and have) developed their own online banking and I imagine it’s a hard sell to pull the smaller banks and credit unions away from the companies who provide their core systems and also can help them with online and mobile banking. QTWO ought to get bought by FISV (or even JKHY, I suppose) if it’s a better service, but the more established and broad-based players give me quite a bit more confidence. Likewise, Monitise (MONI in London, MONIF on the pink sheets) is an appealing technology company, selling mobile banking/payments software to banks on per-user fee model, but they have been clobbered this year as results have disappointed so there may not be a rush there.

Now, that doesn’t mean there isn’t a competitive threat — there is, and it’s substantial, the risk for all software and technology companies is that they can’t afford to fall behind. It probably doesn’t mean JKHY will lose a lot of customers, given the stickiness of their customer relationships, but it does mean that they are going to have to continue to spend substantially on R&D and acquisitions to keep pace with technological development and increased expectations from their client banks and credit unions and from banking customers. But I do feel a lot better about Jack Henry than I do about the more “faddish” new technology providers in banking — there have been many of the years that seemed well positioned, with the previous wave including teensy companies like RDM Corp (RC.TO in Canada, RDMKK on the pinks) and Mitek (MITK). Both were (and are) involved primarily with the “no brainer” of using smartphone cameras to photograph checks for remote deposit, and that service has been widely adopted by most banks and financial apps… but RDM Corp only went from being a $25 million company to a $50 million company, and Mitek Systems saw their patented technology help them become a $100 million company that doubled to $200 million… and then collapsed to $60 million (shareholders did worse than that, thanks to dilution).

That’s not to say that Monitise and Q2 Holdings and the other cool new technology providers won’t eventually do well, of course — just to point out the difference between trying to sell an add-on software or cloud service package to a bank, and being a core supplier to a bank and selling them core software and systems that keep the basic bank functions operating smoothly (or running those systems for them on an outsourced basis) then cross-selling them other integrated software and services to help them provide better services or make more money.

Jack Henry is not really cheap, and it’s quite possible that their recent growth rate will slow, but it’s a very shareholder-friendly company that is holding on pretty tight to its nice niche among small and medium size banks and credit unions, and they have indeed been growing their dividend and, over time, substantially increasing the stability of their sales base by relying more on recurring software and services and processing revenue. They had a pretty thorough presentation at their Analyst Day earlier in the year that you can check out for a good overview of the business, and there’s more detail in their last Annual Report (their 2014 fiscal year ended on June 30).

I don’t know if they’re going to jump 25% in a few months as Copeland says, particularly with the jitteriness of the overall market right now, but they are on pace to continue growing earnings at probably anywhere between 5-15%, and they are conservative enough (no debt, fairly cautious acquisition strategy) to handle a downturn pretty well. With that, I’ll leave it to you to go forth, researchify, and let us know what you think about JKHY or the other banking software providers — just use the friendly little comment box below.


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