BUSINESS
Bright Horizons Family Solutions Inc. provides early education and child care, back-up care, educational advisory, and other workplace solutions services for employers and families. The company operates through three segments: Full Service Center-Based Child Care, Back-Up Care, and Educational Advisory and Other Services. The Full Service Center-Based Child Care segment offers traditional center-based child care and early education, preschool, and elementary education services. The Back-Up Care segment provides center-based back-up child care, in-home child and adult/elder dependent care, school-age camps, virtual tutoring, and self-sourced reimbursed care services through child care centers, school-age campuses, and in-home caregivers, as well as the back-up care network.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, BFAM is expected to continue to be an important Value Builder.
Bright Horizons Family Solutions has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Bright Horizons Family Solutions has a very low Appreciation Score of 13 but a slightly positive Power Rating of 67, and the Negative Value Trend Rating results.
Bright Horizons Family Solutions’ stock is selling significantly above targeted value. The current stock price of $105.83 compares to targeted value 12 months forward of $52.
Bright Horizons Family Solutions’ very low appreciation potential results in an appreciation score of 13 (87% of the universe has greater appreciation potential.)
Bright Horizons Family Solutions has a Power Rating of 67. (This slightly positive Power Rating indicates that BFAM’s chances of achieving favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: the Child Day Care Services comparison group is in a strong phase currently; and recent price action has been slightly favorable. An offsetting factor is the trend in BFAM’s earnings estimates has been unfavorable in recent months.
INVESTMENT PROFILE
BFAM’s financial strength is below average. Financial strength rating is 33.
Relative to the S&P 500 Composite, Bright Horizons Family Solutions has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that BFAM is extremely high risk. All factors are relative weaknesses. Relative weaknesses for BFAM include: low financial strength, high financial leverage, low historical growth, and high earnings variability. BFAM’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. BFAM has unusually low market capitalization.
CURRENT SIGNALS
Bright Horizons Family Solutions’ current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.
Bright Horizons Family Solutions’ current technical position is very strong. The stock price is in a 3.5 month up move. The stock has appreciated 39.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Recent notable positive changes in investment behavior have benefitted Bright Horizons Family Solutions (NYSE: BFAM): the stock rose on very heavy volume.
Recent minimal positive changes in fundamentals have benefitted Bright Horizons Family Solutions (NYSE: BFAM): significant quarterly earnings acceleration occurred.
In light of this we are reviewing our current Overall Rating of D. This review will be completed in the next several days.
On 2/14/24, Bright Horizons Family Solutions (NYSE: BFAM) stock enjoyed a major increase of 10.4%, closing at $105.83. Moreover, trading volume in this advance was exceptionally high at 389% of normal. Relative to the market the stock has been strong over the last nine months and has risen 7.4% during the last week.
CASH FLOW
In 2022, Bright Horizons Family Solutions experienced a very significant reduction in cash of -$230.6 million (-80%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$196.0 million. Non-operating sources contributed +$61.8 million (+32% of EBITDA). Cash taxes consumed -$29.3 million (-15% of EBITDA). Re-investment in the business amounted to -$422.5 million (-216% of EBITDA). On a net basis, debt investors provided +$142.9 million (+73% of EBITDA) while equity investors withdrew -$179.5 million (-92% of EBITDA).
BFAM’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Bright Horizons Family Solutions Peer Group. In most years, Bright Horizons Family Solutions was in the top quartile and second quartile. Currently, Bright Horizons Family Solutions is upper quartile at +32% of EBITDA (+$61.8 million).
BFAM’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Bright Horizons Family Solutions Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Bright Horizons Family Solutions was in the third quartile and second quartile. Currently, Bright Horizons Family Solutions is above median at -15% of EBITDA (-$29.3 million).
BFAM’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Bright Horizons Family Solutions Peer Group. In most years, Bright Horizons Family Solutions was in the third quartile and top quartile. Currently, Bright Horizons Family Solutions is below median at -216% of EBITDA (-$422.5 million).
BFAM’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Bright Horizons Family Solutions Peer Group. In most years, Bright Horizons Family Solutions was in the second quartile and lower quartile. Currently, Bright Horizons Family Solutions is slightly above median at +73% of EBITDA (+$142.9 million).
BFAM’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Bright Horizons Family Solutions Peer Group. (Since 2020 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Bright Horizons Family Solutions was in the lower quartile and top quartile. Currently, Bright Horizons Family Solutions is substantially below median at -92% of EBITDA (-$179.5 million).
BFAM’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Bright Horizons Family Solutions Peer Group as well. (Since 2020 Change in Cash, %EBITDA has experienced a very sharp decline.) In most years, Bright Horizons Family Solutions was in the third quartile and second quartile. Currently, Bright Horizons Family Solutions is substantially below median at -118% of EBITDA (-$230.6 million).
BFAM’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Bright Horizons Family Solutions Peer Group. (Since 2020 Cash, %Revenue has experienced a very sharp decline.) In most years, Bright Horizons Family Solutions was in the lower quartile and third quartile. Currently, Bright Horizons Family Solutions is lower quartile at +3%.
PROFITABILITY
BFAM’s return on equity has improved slightly since 2013. The current level of 7.4% is 5.24X the low for the period and is -22.4% from the high.
This slight improvement was due to strong positive trend in pretax operating return and minor negative trend in non-operating factors.
The productivity of BFAM’s assets declined over the full period 2013-2023: asset turnover has suffered an downtrend although it experienced a very sharp recovery after the 2020 low.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a small negative influence on return on equity.
BFAM’s return on equity is slightly below median (7.4%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at the lower quartile (3.5%) reflecting asset turnover that is below median (0.61X) and pretax margin at the lower quartile (5.7%).
Tax “keep” rate (income tax management) is lower quartile (65.5%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at the upper quartile (3.26X).
GROWTH RATES
There are no significant differences between Bright Horizons Family Solut’s longer term growth and growth in recent years.
Bright Horizons Family Solut’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 6.0% per year.
Total asset growth has been 8.5% per year.
Annual E.P.S. growth has been 10.4% per year. (More recently it has been 75.0%.)
Equity growth has been 6.3% per year.
Bright Horizons Family Solut’s consensus growth rate forecast (average of Wall Street analysts) is 9.7% — in line with the average of the historical growth measures.
Relative to the Bright Horizons Family Solutions Peer Group, Bright Horizons Family Solutions historical growth measures are generally third quartile. E.P.S. growth (10.4%) has been substantially below median. Total asset growth (8.5%) has been below median. Revenue growth (6.0%) has been at the lower quartile. Equity growth (6.3%) has been lower quartile.
Consistent with this pattern, consensus growth forecast (9.7%) is also at the lower quartile.
PRICE HISTORY
Over the full time period, Bright Horizons Family Solutions! stock price performance has been in line with the market. Between April, 2013 and February, 2024, Bright Horizons Family Solutions! stock price rose +226%; relative to the market, this was a +4% gain. Significant price moves during the period: 1) October, 2021 – September, 2022: -65%; and 2) April, 2013 – August, 2019: +409%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 28.0% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of 28.0% is upper quartile relative to Bright Horizons Family Solutions Peer Group.
Current 5-year total return performance of -3.2% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -3.2% relative to S&P 500 Composite, Bright Horizons Family Solutions total return performance is lower quartile relative to Bright Horizons Family Solutions Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, BFAM’s overall valuation is high. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Price/earnings ratio is upper quartile. Price/equity ratio is above median. Ratio of enterprise value/assets is above median. The lowest factor, the ratio of enterprise value/revenue, is slightly below median.
Relative to Bright Horizons Family Solutions Peer Group, BFAM’s overall valuation is high. The highest factor, the price/earnings ratio, is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Price/equity ratio is above median. Ratio of enterprise value/assets is below median. The lowest factor, the ratio of enterprise value/revenue, is below median.
Bright Horizons Family Solutions has a very large value gap compared to the median valuation. For BFAM to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 3.44X to 4.18X. If BFAM’s ratio of enterprise value/revenue were to rise to 4.18X, its stock price would be lower by $30 to $135.
For BFAM to hit lower quartile valuation relative to the Bright Horizons Family Solutions Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.44X to 2.98X. If BFAM’s ratio of enterprise value/revenue were to fall to 2.98X, its stock price would decline by $-18 from the current level of $106.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, BFAM is expected to continue to be an important Value Builder.
Bright Horizons Family Solutions current Price Target of $51 represents a -52% change from the current price of $105.83.
Bright Horizons Family Solutions’ very low appreciation potential results in an appreciation score of 13 (87% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 13, the moderately high Power Rating of 67 results in an Value Trend Rating of D.
Bright Horizons Family Solutions current Price Target is $51 (-5% from the 2022 Target of $54 and -52% from the 02/14/24 price of $105.83). This plateau in the Target is the result of a +1% increase in the equity base and a -6% decrease in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a very large negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 16.2% — above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is well above the 2021 low of 8%.
PTR’s growth forecast is 5.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2017 and 2022. The current forecast is well below the 2020 peak of 13%.
PTR’s cost of equity forecast is 9.0% — slightly above recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2014 and 2022. The current forecast is above the 2021 low of 5.3%.
At Bright Horizons Family Solutions! current price of $105.83, investors are placing a positive value of $60 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 10.7% versus a cost of equity of 6.8%.
PTR’s 2024 Price Target of $51 is based on these forecasts and reflects an estimated value of existing assets of $58 and a value of future investments of $-7.
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