Bright Horizons Downgraded By RBC Capital Markets On Short-Term Risk-Reward

Shares of child-care provider Bright Horizons Family Solutions Inc BFAM have had a strong run over the past year, prompting one analyst to re-evaluate his stance on the company.

The Analyst

RBC Capital Markets analyst Gary Bisbee downgraded the shares of the company from Outperform to Sector Perform and increased the price target from $95 to $98.

The Thesis

Although positive on the business, management team and long-term growth potential of Bright Horizons Family, the stock's short-term risk-reward is less compelling, as the shares trade at the upper end of the valuation range, Bisbee said in a Tuesday note. (See the analyst's track record here.) 

Fundamentally, the composition of the company's earnings growth has weakened in the last two years, with a lower contribution from revenue and margins and a more material benefit from interest, taxes and share count, the analyst said. 

The analyst projects re-acceleration in earnings growth in 2018 as margins inflect to positive year-over-year growth. Bright Horizons has to work harder to deliver to its historical growth, which poses risks to its high valuation, Bisbee said. 

With the benefit from the adoption of employee comp tax accounting expected to drop, Bisbee sees some upward pressure on the tax rate, putting downward pressure on EPS growth in future years.

Despite the near-term caution, RBC Capital Markets remains positive on Bright Horizons' longer-tern potential. The stock can appreciate over the next several years as it compounds earnings at above-average levels, the firm said. 

The Price Action

Bright Horizons Family shares are up about 35 percent over the past year.

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