Consider This Leading Education Stock

Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bright Horizons Family Solutions (NYSE: BFAM) is an employer-sponsored child care and early-education service company with a promising short-term outlook. It is expected to outperform within the next 12 months, fueled by strong earnings growth. Multiple reasons lead me to believe that this firm will deliver as expected. Below we will analyze the main items one should take into account when looking into Bright Horizons.

Considerable competitive advantages

There are several competitive advantages that position Bright Horizons in an outstanding spot to outperform in the future, increasing its global market share. In the first place, scale-wise, the firm is the biggest employer-sponsored child-care provider in the U.S., with quintuple the market share of its nearest competitor, and second in the United Kingdom and Ireland. With a 97% client-retention rate, the company also displays robust performance in the corporate relations area.

Quality also provides a competitive advantage. Not only is the company’s reputation outstanding, but its child-care centers stand out for their excellence, usually complying or exceeding market and regulation standards, which parents tend to increasingly pay attention to.

This differentiation is also evidenced by satisfaction rates between employees, employers, and parents. Within these last two categories, for instance, more than 95% of people surveyed by Credit Suisse (over the past five years) have expressed satisfaction regarding the company’s services.

These advantages are reflected in the company´s multiples. While Bright Horizons trades at 89.3x P/E, 2x P/S and 0. x P/B, DeVry (NYSE: DV), one of its main competitors, trades at 13.4x P/E, 0.9x P/S and 1.4x P/B.

The considerable difference in the P/E rates indicates that there is a strong bet on Bright Horizons´ future performance. By December 2014, the company’s earnings are expected to provide a forward 24.6x P/E, approximately, meaning that earnings per share are projected to reach over triple the current figure.

Nevertheless, DeVry, also in the worldwide education-service business (although not strictly overlapping with Bright Horizons’ activities), offers better operating margins (approximately 12.7%) than Bright Horizons (9%), and is not a company that should stay off your radar for many reasons. 

First, DeVry has a very interesting strategy for growing by acquisitions. The company has been expanding into large emerging markets, such as Brazil. DeVry acquired Faculdade Boa Viagem (FBV) in February 2012 and Faculdade do Vale do Ipojuca last September, which provided a solid share in the fast-growing Brazilian education market. In addition, DeVry acquired American University of the Caribbean, which positioned this company as a leader in international medical education.

Second, DeVry has a very effective diversified model. The company is one of the leading education providers in the field of technology, business, healthcare and finance. In the past, DeVry focused in technology education but nowadays, it provides a much broader range of career opportunities. While Bright Horizons is the leader in a very interesting niche, DeVry has a much higher diversification, which mitigates risks.

It wouldn't be illogical to think about the possibility of DeVry acquiring Bright Horizons, as DeVry has been experiencing a decline in enrollments due to a weak macro scenario and potential adult students who decline taking a loan.

Bright Horizons is exposed to a niche that does not require potential students to take personal loans and could provide the type of growth that DeVry's management has been looking for. I think that child education has considerable fewer risks and less macro exposure than adult-focused courses.

Bright Horizons has an effective business model

Concerning Bright Horzons' business model, various elements should be highlighted. For starters, the company’s paradigm is contract-centered, meaning that most customers (employers) are tied to the firm by a three-to-10 year contract.

Two main consequences derive from this commercial scheme: (1) the services provided tend to persist through economic cycles –revenue consistently grew between 2001 and 2011, even through the sub-prime crisis; income CAGR reached one ~10% in this period; and (2) the firm’s visibility with its clients is considerably elevated, especially due to the annual fee upsurges.

Another strength in Bright Horizons’ business model is its co-funding scheme, which stipulates that clients usually finance (fully or partially) the creation and maintenance of the facilities they sponsor. This strategy delivers interesting results since it considerably reduces the firm’s capex while increasing returns on investment (that oscillate between one 25% and more than 100%, depending on the center type).

The effectiveness of Bright Horizons´ business  model is also evidenced by its figures: both revenue and EBITDA have consistently grown for over 10 years. Current revenue reach $1.1 billion, revenue per share is $145.02, and its EBITDA is $158 million.

These statistics acquire extra relevance when compared to competing companies, such as Noah Education (NYSE: NED), which currently generates about $29.6 million in total revenue, $0.81 in revenue per share and barely $6.5 million in EBITDA.

Noah is a very interesting emerging markets play. In the recent earnings report Noah reported 40% revenue growth, which was quite higher than the 8% that management expected. In addition, net profit increased a whopping 213%. Management explained in the last earnings call that such performance demonstrates the strength that Noah is experiencing in the kindergarten business.

However, Noah Education, which provides, in China, some private-education services that are similar to the ones offered by Bright Horizons, is much smaller in scale and number of employees and customers and has plenty of room to develop while shares are priced quite low if compared to historical values.

Growth prospects

Bright Horizons holds ~4% of the child-care market share (an annual $40 billion industry) in the U.S. This percentage is expected to increase as the country enters an upward economic cycle, dual-income families multiply (over 65% of mothers with children under six years old contribute to the U.S. workforce) and concerns for high-quality early education grow (the number of children enrolled in these type of centers increased by over 40% since 2005).

Market share is also projected to rise internationally: several European countries like the Netherlands and the U.K. should increase their demand as recent public policy decisions (in 2005 for the Netherlands and 2006 for the U.K.) make center-based child care more affordable and accessible to working families.

Organic international expansion seems likely as the company expresses its intentions to multiply the infrastructure in Greater London and the Netherlands, obtain larger market shares in the U.K. and India, and diversify its customer base by including operations in remaining parts of Europe, Asia and the Middle East.

Pricing power is also strong: annual 3% tuition increases are usually stipulated in the contracts. If combined with existing center revenue growth and new openings and acquisitions, income CAGR is expected to reach more than one 7% by 2015.

These factors should also stimulate margin expansion. Adjusted EBITDA margin is projected to increase ~15% (CAGR) by 2015. Calculations also reveal that, as a result of this (and an expected ~0.5x EBITDA deleverage per year), Adjusted EPS CAGR from 2012 through 2015 should reach ~35. 

Conclusions

Bright Horizons leads the employer-sponsored center-based child-care segment in the U.S., with approximately quintuple the market share of the second company in line, Knowledge Learning (~110 centers), and about 11 times the share of the third leading firm, Children´s Choice (~50 centers). Since these competing companies do not trade in the stock market and Bright Horizons offers plenty of upside perspectives, investing in the company would be a wise choice.


Victor Selva has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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