Back-up Care Expansion And Technology Initiatives Will Improve Client Engagement In Childcare Services

Key Takeaways

• Expanding in back-up care and technology initiatives enhances revenue growth, net margins, and client engagement.
  
• U.K. progress and education advisory investments boost profitability and long-term earnings potential.
  
• Slow recovery in key segments and challenges in U.K. operations, along with potential center closures, could impact revenue growth and overall profitability.

Catalysts

Provides early education and childcare, back-up care, educational advisory, and other workplace solutions services for employers and families in the United States, Puerto Rico, the United Kingdom, the Netherlands, Australia, and India.

• Bright Horizons Family Solutions is expanding its client base in the back-up care segment, adding new clients such as Progressive Corporation and Brookfield Property, which is expected to drive revenue growth and improve operating margins due to economies of scale.
  
• The company is making operational and financial progress in the U.K. and anticipates continued improvements towards pre-pandemic performance levels, which should lead to better net margins and overall profitability.
  
• Investments in technology initiatives and personalized marketing in the back-up care segment are resulting in increased use and employee engagement, positioning the company for revenue growth and improved net margins through operational efficiencies.
  
• The education advisory business is focusing on revitalizing participant growth through investments in team, product, and marketing, which is expected to boost revenue growth and improve long-term earnings potential.
  
• The successful hosting of the On the Horizon Summit has reinforced client relationships and could lead to increased client retention and expansion opportunities, positively impacting future revenue growth and earnings.

Bright Horizons Family Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bright Horizons Family Solutions's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $323.6 million (and earnings per share of $5.02) by about December 2027, up from $116.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.4x on those 2027 earnings, down from 54.0x today. This future PE is greater than the current PE for the US Consumer Services industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 3.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

Bright Horizons Family Solutions Future Earnings Per Share Growth

Risks

• The low single-digit enrollment growth and occupancy rates in the low 60s suggest a slow recovery in full-service child care centers, which could limit revenue growth potential.
  
• The U.K. operations, while improving, continue to face challenges and lag behind pre-pandemic performance levels, potentially impacting net margins due to ongoing operational inefficiencies.
  
• The muted participant growth in the Education Advisory segment, specifically EdAssist, indicates challenges in revitalizing this part of the business, potentially affecting overall earnings growth.
  
• Continued reliance on pricing increases to drive revenue growth may face limitations if inflation and wage pressures taper, impacting future profitability and net margins.
  
• The closure of centers, including up to 50 globally in 2024 (with a significant portion in the U.K.), reflects ongoing struggles with underperforming centers that could negatively impact overall operational efficiency and earnings.

Valuation

• The analysts have a consensus price target of $138.64 for Bright Horizons Family Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $162.0, and the most bearish reporting a price target of just $102.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.3 billion, earnings will come to $323.6 million, and it would be trading on a PE ratio of 33.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of $108.14, the analyst's price target of $138.64 is 22.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.