The Horizon is Bright at Bright Horizons

Bright Horizons Family Solutions (BFAM) is a steady eddie grower. The company is known for operating child care centers within corporations. This isn't just babysitting...this is child care and education.

In some ways, BFAM represents an investment in productivity enhancement for its customers. Employer sponsored child care programs drive down employee turnover and reduce absenteeism. Companies reduce the recurring costs of recruiting new employees, and one could argue, enhance the return on investment of their firm. This can be a very strong differenting factor in attracting, recruiting, and retaining employees.

This week's Wall Street Transcript (subscription required) features an interview with Sandi Gleason and Robert Schwarzkopf, portfolio managers at Kayne Anderson Rudnick who focus on small cap investing.

This is a growing market...I have difficulty fathoming how any large company could tell its employees that it was abandoning its child care services. As the TWST interview points out:

"As I mentioned, the child care market is growing, and the onsite,employer-sponsored market is growing more rapidly than the overallmarket. The company has a visible pipeline of new centers. Currently,there are 60 new centers in the pipeline that are scheduled to open overthe next 12 to 24 months. The company has only 100 of the Fortune 500 companies and only 10% of employers currently offer work site childcare, which exemplifies the future opportunities."

The company is the largest operator in this business. Tuitions increase by 4-5% a year and new "stores" grow by 8-10%, hence top line growth of some 15% is feasible. Management believes that it can grow operating margins by 20-50 basis points a year through improved utilization.

The stock, currently about $32 is down some 13.5% YTD and down about 25% for the TTM. Have a look at the ROIC and free cash flow characteristics over the last five Years:

                                  ROIC            FCF(millions)
2005.........................16.8%..........$34.5
2004.........................14.6%..........$24.3
2003.........................13.6%..........$11.6
2002.........................13.9%..........$29.1
2001.........................12.8%..........$10.1

Paying no dividend, the company has continued to reinvest in its growth. However, in 2005 the company began to buyback some stock with the purchase of $11.23 million in stock, a net purchase of $4.8 million. So far this year, this has accelerated with the repurchase of $34.25 million in stock resulting in net reduction of about $32 million. Fully diluted shares outstanding are 28.02 million versus a peak of 28.56 two quarters ago.

Given the free cash flow characteristics, the balance sheet is clean with very little long term debt.

On a valuation basis, the company with an Enterprise Value of about $870 million, is trading at 13.6 times EBIT for the last twelve months, a reasonable multiple for this profitability and for this quality.



Disclaimer: Neither I, my family, nor clients have a current position in BFAM.