Rising Employer Child Care Demand Will Drive Powerful Long Term Upside Potential

Catalysts

About Bright Horizons Family Solutions

Bright Horizons Family Solutions partners with employers to provide child care, back up care and education advisory services that help working families balance careers and caregiving.

What are the underlying business or industry changes driving this perspective?

• Rapidly rising employer recognition that child care and back up care are critical productivity tools is driving broader benefit adoption across tens of thousands of untapped prospects, supporting sustained double digit revenue growth and expanding earnings power as utilization scales.
• Very low penetration within the existing eligible employee base, currently under 10 percent of more than 10 million covered lives, creates a long runway to grow unique users and frequency of use, which should meaningfully lift recurring revenue and operating margins over time.
• Increasing pressure on companies to attract and retain talent in a tight labor market is elevating family care and education benefits from nice to have perks to core strategic offerings, strengthening Bright Horizons pricing power and supporting continued net margin expansion.
• The growing need for flexible, hybrid work support, particularly for school age and variable schedule care, plays directly into Bright Horizons diversified delivery network and technology driven placement capabilities, allowing high incremental volume to flow through at attractive incremental margins and earnings.
• Improving government and policy support for working families, such as enhanced funding in markets like the U.K., is stimulating demand for high quality, formal child care solutions, which should drive higher occupancy in centers, better fixed cost absorption and structurally higher segment margins.

Assumptions

This narrative explores a more optimistic perspective on Bright Horizons Family Solutions compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Bright Horizons Family Solutions's revenue will grow by 8.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.0% today to 9.9% in 3 years time.
• The bullish analysts expect earnings to reach $358.9 million (and earnings per share of $6.27) by about December 2028, up from $200.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 30.2x on those 2028 earnings, up from 28.4x today. This future PE is greater than the current PE for the US Consumer Services industry at 16.7x.
• The bullish analysts expect the number of shares outstanding to decline by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Slowing enrollment growth in full service centers, with management now expecting roughly 1 percent enrollment growth as they exit the year, suggests that demand for core center based child care could be structurally weaker than anticipated. This would cap long term tuition revenue growth and limit operating leverage in that segment, pressuring overall earnings.
• Persistent underutilization across a meaningful subset of centers, including roughly 12 percent of locations operating below 40 percent occupancy and an active plan to close 25 to 30 centers per year, indicates that the footprint may be oversized for long term demand patterns. This could lead to ongoing closure costs, weaker fixed cost absorption and constrained net margins.
• Relying heavily on back up care as the primary growth engine, with segment margins at the high end of the 25 to 30 percent long term target range, creates risk that employer benefit budgets or economic pressures on end consumers eventually slow utilization from today’s unusually strong levels. This would reduce segment revenue growth and erode group operating margins from their recent peak.
• Sustained wage inflation in child care, alongside a pricing strategy that targets only about a 100 basis point spread between tuition increases and wage growth and an average 4 percent tuition increase, risks a future period where competitive or affordability constraints prevent price hikes from keeping pace with labor costs. This would compress segment level margins and limit adjusted EPS growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Bright Horizons Family Solutions is $160.0, which represents up to two standard deviations above the consensus price target of $129.44. This valuation is based on what can be assumed as the expectations of Bright Horizons Family Solutions's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $160.0, and the most bearish reporting a price target of just $99.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $358.9 million, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $100.71, the analyst price target of $160.0 is 37.1% 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.