Over the past six months, Bright Horizons’s shares (currently trading at $102.46) have posted a disappointing 11.2% loss, well below the S&P 500’s 10.4% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Bright Horizons, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Bright Horizons Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why BFAM doesn't excite us and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in Education Services companies should track organic revenue in addition to reported revenue. This metric gives visibility into Bright Horizons’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Bright Horizons’s organic revenue averaged 10.6% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. Projected Free Cash Flow Gains to Pump Profits
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 predict Bright Horizons’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 8.1% for the last 12 months will increase to 9.4%, giving it more flexibility for investments, share buybacks, and dividends.
3. New Investments Bear Fruit as ROIC Jumps
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
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. Over the last few years, Bright Horizons’s ROIC averaged 1.7 percentage point increases each year. 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. Following the recent decline, the stock trades at 20.7× forward P/E (or $102.46 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
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