Here’s Why We Think Bright Horizons Family Solutions (NYSE:BFAM) Is Well Worth Watching

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Like a puppy chasing its tail, some new investors often chase ‘the next big thing’, even if that means buying ‘story stocks’ without revenue, let alone profit. And in their study titled Who Falls Prey to the Wolf of Wall Street?’ Leuz et. al. found that it is ‘quite common’ for investors to lose money by buying into ‘pump and dump’ schemes.

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in Bright Horizons Family Solutions (NYSE:BFAM). While profit is not necessarily a social good, it’s easy to admire a business than can consistently produce it. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.

See our latest analysis for Bright Horizons Family Solutions

How Fast Is Bright Horizons Family Solutions Growing?

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. Impressively, Bright Horizons Family Solutions has grown EPS by 21% per year, compound, in the last three years. So it’s not surprising to see the company trades on a very high multiple of (past) earnings.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. While we note Bright Horizons Family Solutions’s EBIT margins were flat over the last year, revenue grew by a solid 8.9% to US$1.9b. That’s progress.

NYSE:BFAM Income Statement, July 3rd 2019
NYSE:BFAM Income Statement, July 3rd 2019

The trick, as an investor, is to find companies that are going to perform well in the future, not just in the past. To that end, right now and today, you can check our visualization of consensus analyst forecasts for future Bright Horizons Family Solutions EPS 100% free.

Are Bright Horizons Family Solutions Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$8.9b company like Bright Horizons Family Solutions. But we do take comfort from the fact that they are investors in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at US$127m. This suggests to me that leadership will be very mindful of shareholders’ interests when making decisions!

It’s good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I’d say they are indeed. I discovered that the median total compensation for the CEOs of companies like Bright Horizons Family Solutions with market caps between US$4.0b and US$12b is about US$6.9m.

The CEO of Bright Horizons Family Solutions only received US$3.4m in total compensation for the year ending December 2018. That’s clearly well below average, so at a glance, that arrangement seems generous to shareholders, and points to a modest remuneration culture. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of a culture of integrity, in a broader sense.

Should You Add Bright Horizons Family Solutions To Your Watchlist?

You can’t deny that Bright Horizons Family Solutions has grown its earnings per share at a very impressive rate. That’s attractive. If that’s not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the takeaway for me is that Bright Horizons Family Solutions is worth keeping an eye on. One of Buffett’s considerations when discussing businesses is if they are capital light or capital intensive. Generally, a company with a high return on equity is capital light, and can thus fund growth more easily. So you might want to check this graph comparing Bright Horizons Family Solutions’s ROE with industry peers (and the market at large).

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.