There is a reopening play investors may be missing.
Bright Horizons Family Solutions
(ticker: BFAM) operates about 1,000 daycare centers, mostly across the U.S. in addition to the U.K., the Netherlands and India. Covid-19 led to facility shutdowns—about 7% permanently closed—and the company is still recovering from the pandemic. Roughly 10% of its centers remain closed, and revenue dropped 23% in the first quarter from a year earlier as enrollment runs 35% below prepandemic levels.
On the surface, it might not be surprising that the company’s stock is still down 7.8% from the end of February 2020, when it lost more than half its value, or that it’s lagging behind the
42% rise. But investors are missing some key points, says Jefferies analyst
“I think this is the most misunderstood stock in the marketplace today,” says Mazari. His price target is $215, 50% higher than where it’s currently trading and the most bullish call among the Wall Street analysts tracking the stock, according to FactSet.
Core to Mazari’s call is Bright Horizons’ back-up care business, which operates with a margin three times as great as the company’s full-service child-care center business. The segment’s rate of growth doubled during the pandemic, and it now accounts for a quarter of overall revenue.
Leading up to the pandemic, Mazari says back-up care, which includes in-home child care and has recently added virtual tutoring, was an underappreciated benefit. The segment boomed as schools closed and parents worked from home, with companies including
(TGT) adding back-up care to its suite of employee benefits in 2020. Other companies added days. Mazari says
(COL), for example, now gives more than 30 days of back-up care benefits while his own employer gives 12 days, up from 8 before the pandemic. An employer typically pays 80% of back-up care costs.
“The market thinks back-up care is a Covid phenomenon,” Mazari says. “But companies realized it’s a great benefit that employees value,” making employers unlikely to revoke or reduce the benefit as offices and schools reopen, even if work-from-home at least partially sticks. On its earnings call last month, management said it recently added
(SHOP) as new back-up care clients—showing the perk is being added even as children are on track to return to school in fall and vaccines make more parents comfortable with sending small children back to daycare.
There’s more behind Mazari’s bullish call. In April, President Biden announced a plan for free universal preschool for all 3- and 4-year-olds. That age range is Bright Horizons’ bread and butter, causing some investors to sour on the stock after it had reclaimed its prepandemic level. But Mazari says the company’s clients’ average income is about $250,000—what he says is likely too high to be eligible for free pre-K. “The market believes free pre-K is a negative for Bright Horizons, but we think it’s a positive,” he says.
Aside from the idea that the president’s plan probably won’t affect Bright Horizons’ customer base, Mazari says the government is going to need to partner with a facility operator. (The other two big players, KinderCare and Learning Care Group, are owned by private-equity firms.). There aren’t enough daycare centers today and the elementary school system doesn’t have the capacity to add what Mazari estimates would be about 5 million kids entering the system thanks to free pre-K. “So the government will become a customer,” Mazari says, a point he believes is lost on investors.
“This company falls really under the radar,” says Mazari. “This is a reopening play that isn’t trading like one.”
Write to Lisa Beilfuss at email@example.com
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