Jack Henry's stock is safe from banking turmoil. Now is the time to buy.

Companies whose stocks are dragged down by association with more troubled companies are often thrown out with the bathwater during short-term market turmoil. 

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In March, investors threw out the baby with the bathwater: Since mid-February, the S&P 500 financial sector has dropped 13%, especially bank stocks, which have fallen 28%. In this baby's case, Jack Henry & Associates JKHY 0.98% (ticker: JKHY) offers financial software.

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There is nothing wrong with investors' "shoot first, ask questions later" approach to trading. A small bank or other financial institution is among Jack Henry's 8,000 customers - an institution at the center of the recent turmoil. As a result of Jack Henry's decline in shares this year, the company's valuation has declined to its lowest level in years after prior years had seen it return 18% annually.

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A consensus price target of $175 has been set by analysts, which is an increase of 20% from the stock's recent $148 high. Approximately $11 billion is invested in Jack Henry, which has minimal debt and yields 1.4% in dividends. 

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No matter how the banking crisis affects Jack Henry's business, the long-term trends remain the same. The company's core business is providing software for everyday operations at banks. Information technology is used by banks to manage customer accounts, process checks, and manage loans and deposits—all nondiscretionary banking services.

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David Foss, CEO and chairman of Jack Henry, says the company offers "nearly everything a U.S. bank or credit union needs."

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In addition to Fidelity National Information Services FIS 3.18% (FIS) and Fiserv FISV 0.60% (FISV), the Monett, Mo.-based firm competes with Fiserv FISV 0.60% (FISV). A bank or credit union with assets ranging from $500 million to $50 billion is Jack Henry's sweet spot. According to Foss, nearly half of U.S. banks have at least $1 billion in assets, and nearly 10% of credit unions do.

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The past six weeks' action won't affect Jack Henry's revenues much unless there is widespread bank and credit union failure among its massive customer base. Subscriptions make up more than 80% of the business, with contracts that average seven years. In a bank, the number of accounts or assets, or the number of members in a credit union, may affect sales. Debit card and check payments, for example, provide some of the company's transaction-based revenue, which management forecast to slow this year. There is no tie between Jack Henry's sales and the value of deposits in any of its contracts.

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In the market right now, there's a misconception that Jack Henry will be adversely affected if deposits migrate to the largest banks, says UBS analyst Rayna Kumar. Nevertheless, Jack Henry will still receive payments as long as the bank exists, since its model doesn't depend on deposits.

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According to Kumar, Jack Henry's stock is a Buy with a $184 price target-a 25% increase over its recent price. Jack Henry still recorded positive revenue growth during the 2008-09 global financial crisis: 11.5% in 2008, 0.4% in 2009, and 11.2% in 2010. 

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A recent banking crisis might actually benefit the company since depositors might spread their cash over more banks to ensure that their accounts don't exceed the federal deposit insurance limit of $250,000. Jack Henry's revenue could increase depending on how many bank accounts and credit union accounts it has. 

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In recent years, Jack Henry's steadily growing revenue and good visibility into the future have earned the company a relatively rich valuation multiple. The declines in early-2023 make the stock a good entry point for investors.

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Lori Keith, portfolio manager for Parnassus Mid Cap (PARMX), which owns shares of Jack Henry, said the stock has been overreacted due to the stickiness of its products.

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Over the past five years, the stock has traded for an average of 36.5 times its forecast earnings over the next year, but now stands at about 28 times, its lowest valuation in six years. In the past half-decade, Jack Henry has traded at an average of a 100% premium and a low of 50% to the S&P 500 index.

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The growth prospects for Jack Henry remain positive. In the coming years, analysts expect revenues to grow by high single digits and earnings-per-share to grow by about 10%.

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This comes after Wall Street forecasts EPS of $4.82 for fiscal 2023, down 2% from fiscal 2022, on roughly 6% revenue growth, to $2.1 billion. A slower pace of bank mergers and acquisitions this year is expected to lead to a decline in early contract termination fees in fiscal 2023, the company said earlier this year. Jack Henry's subscription-based services are more important than lumpier, one-time revenue.

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While financial tremors continue and profits dip, banks will invest in IT systems in order to remain competitive, reduce costs, and replace paper-based processes with digital ones. In a survey by UBS last year, 78% of technology executives at 100 banks and credit unions expected to increase their spending on Jack Henry's core IT services. Jack Henry also added more than 50 new customers each year in addition to growing its business with existing clients.

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A transition from on-premises computing to a private cloud environment is the long-term story for Jack Henry's core services, where it offers over 100 products. Eventually, Amazon.com AMZN 0.95% (AMZN) AWS will take over, and Microsoft MSFT 2.55% (MSFT) Azure will follow. As a result of that modernization process, Jack Henry will generate more revenue and banks will have greater capabilities, says Foss.

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Besides its core business, Jack Henry is also promoting complementary services that are expected to generate incremental revenue. In the digital era, small banks need white-label digital banking platforms like Banno to stay competitive. The company's revenue is dependent on active users, and its software offerings are scaleable-profit margins will rise as more banks and users join.

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With more banking drama on the way, Jack Henry provides investors with a way to invest in a supplier without becoming embroiled in it.

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