Analysts expect this childcare provider to grow at more than 15% annually over the next five years.
Bright Horizons Family Solutions (BFAM)
From Ian Wyatt’s Million Dollar Portfolio
One childcare company is working to help employers and parents receive great childcare in the most convenient manner.
It can do this by partnering with employers who now offer child care services as part of a benefits package for their team members. The company is transforming to be more technology-focused, and that move should help increase growth in the coming years.
The company is called Bright Horizons Family Solutions (BFAM). Bright Horizons is a premium provider of private education through preschools and employer-sponsored child care.
The company provides preschool education and “backup childcare” services. Backup childcare allows parents to use Bright Horizons in a situation where their normal child care falls through.
Most child care centers focus on selling services directly to individuals. However, Bright Horizon has taken a different approach by focusing on selling its services directly to employers.
Top employers are looking to add new benefits to keep their employees happy and productive. And for many large corporations, child care is one such service that they are adding to the benefits mix.
Companies like Salesforce and NBVC Universal utilize Bright Horizons to provide on-site child care for employees, Meanwhile, Home Depot and T. Rowe Price use the company’s services to provide “backup childcare” for team members.
The company was started in Massachusetts, operating 695 centers in the U.S. with a capacity of 88,400 children. The company also has over 300 additional facilities in the U.K. and the Netherlands, supporting 27,000 kids. The average tuition in the U.S. is around $18,000.
Because of its size, Bright Horizons has been able to make a large investment in technology.
The company introduced a new service called My Bright Day, which gives parents an online account of what their child did during the day. Additionally, the company’s mobile app allows parents to book space for their child at one of the locations.
So, let’s say my nanny calls in sick and can’t watch the kids. Instead of calling several day care locations to see who has availability, I can simply open the app, see availability and book a location.
In many ways, Bright Horizon offers parents on-demand child care. In some ways, it’s like the way in which Uber makes it easy to request a ride across town.
This technological advantage cannot be understated. Many smaller childcare centers simply are not large enough to make a large capital investment in technology. Therefore, Bright Horizons will continue to have a competitive advantage.
I believe that the millennial generation demands technology innovation and will expect it when it comes to child care. Therefore, companies that want to attract top employees will need to consider childcare as a benefit. And they’ll want to partner with a provider that’s able to provide an outstanding experience for the children and parents.
The demographics also favor a thriving market for years to come.
Back in the 1980s, there were 25 million women working in the U.S. workforce. Today, that number is 68 million. Meanwhile, 60% of American households are dual-income. This means that there are more families in need of child care.
Great employees are a key factor of the company’s success. With 31,000 employees servicing 1,100 corporate clients and over 100,000 children, it’s crucial that employees are happy and providing outstanding service.
The company has won many awards as one of the best places to work. As a result, the company’s employee retention is double the industry average. And in surveys of parents and employees, 95% say they are satisfied with the quality of service.
Historically, the company has been growing at 10% to 15% per year.
Bright Horizons has not yet reported full-year results for calendar year 2017. During the first nine months of the year, the company generated revenues of $1.3 billion. Meanwhile, net income was $105 million or $1.89 per share.
For 2017, consensus analyst estimates put EPS at $2.65 with revenues of $1.7 billion. Looking forward to next year, EPS are expected to grow 14% and revenue should tick up by 9% to $1.9 billion.
Those numbers could prove to be too conservative.
Bright Horizons should benefit from the Trump tax break. Additionally, tax reform just doubled the child-care tax credit. Plus, it increased the income qualification from $115,000 for couples to $400,000. That essentially means more families will be able to obtain a credit for their child-care expense.
Additionally, the impact of technology innovation should allow Bright Horizons to take additional market share in the coming years.
Shares are currently trading around $97. My target price for the stock is $120. That reflects a price-to-earnings ratio of 30, based upon 2019 EPS of around $4.
With 24% upside from the recent price, Bright Horizons offers investors an attractive entry point around $100.
Recommended Action: BUY Bright Horizons below $100.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, www.wyattresearch.com, January 26, 2018