Over the last six months, Bright Horizons’s shares have sunk to $84.73, producing a disappointing 15.7% loss - a stark contrast to the S&P 500’s 5.4% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Bright Horizons, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Bright Horizons Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Bright Horizons. Here are three reasons there are better opportunities than BFAM and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Bright Horizons grew its sales at a 14.1% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Free Cash Flow Projections Disappoint
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts’ consensus estimates show they’re expecting Bright Horizons’s free cash flow margin of 8.8% for the last 12 months to remain the same.
3. New Investments Bear Fruit as ROIC Jumps
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Bright Horizons’s ROIC averaged 1.5 percentage point increases each year over the last few years. This is a good sign, and we hope the company can continue improving.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Bright Horizons, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 16.7× forward P/E (or $84.73 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Bright Horizons
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