Bright Horizons Family Solutions IPO Will Be A Winner

| About: Bright Horizons (BFAM)
This article is now exclusive for PRO subscribers.

On Friday, leading childcare and early education provider Bright Horizons Family Solutions (NYSE:BFAM) will once again trade on the public markets. The company, which was taken private by Bain Capital in 2008 traded on the Nasdaq from 1998 to 2008.

Bright Horizons offers three services:

· Childcare and early education, which makes up 87% of revenue.

· Back-up dependent care.

· Educational advisory services.

The company has relationships with over 850 different clients. Of the Fortune 500 companies, 130 use Bright Horizons services.

As of September 30th, 2012, Bright Horizons had 776 centers serving over 87,000 children in North America and Europe. The company has centers in the United States, United Kingdom, Netherlands, Ireland, Canada and India. Since being taken private by Bain, the company has expanded internationally through acquisitions. Bright Horizons has also acquired 123 different centers since 2006.

The company's strengths:

· Market leading services provider.

· Collaborative, long-term relationships with diverse customer base.

· Commitment to quality.

· Market leading people practices.

· Capital efficient operating model provides platform for growth, with attractive economics.

· Proven acquisition track record.

Going forward, Bright Horizons has a growth strategy that includes:

· Grow client relationships.

· Sustain annual price increases to enable continued investments in quality.

· Increase utilization at existing centers.

· Selectively add new lease/consortium centers and expand through selective acquisitions.

Revenue has increased from $852.3 million in 2009 to $878.2 million in 2010 to the most recent $973.7 million in 2011. In the nine months ending September of 2012, Bright Horizons posted revenue of $797.5, an increase from the prior year's $724.8 million. Net income in 2011 totaled $19.1 million. The most recent nine months has seen $15.9 million in net income.

Here are the top reasons I think investors should think about investing in Bright Horizons:

1. Customer base - The company counts huge global names like BP p.l.c (NYSE:BP), Chevron (NYSE:CVX), Amgen (NASDAQ:AMGN), Bristol-Myers (NYSE:BMY), Johnson & Johnson (NYSE:JNJ), Home Depot (NYSE:HD), Staples (NASDAQ:SPLS), Starbucks (NASDAQ:SBUX), Duke University, and the FDIC as clients. The huge base of Fortune 500 companies bodes well for maintaining revenue and expanding to other locations.

2. Business model - Bright Horizons is not a typical daycare center. It operates the majority (70%) of its centers as single employer locations. The company provides daycare and education inside or nearby a particular employer's location. Bright Horizons has a huge customer base in fields like pharmaceuticals and universities.

3. Room for domestic expansion - Bright Horizons has locations in 42 states in America, leaving eight states without locations. Of the states, Bright Horizons has 40 or more locations in the states of California, Illinois, Massachusetts, New Jersey and New York. With large employee headquarters in every state, Bright Horizons has plenty of locations where it can put its single employer locations.

4. Room for international expansion - Since being taken private, Bright Horizons has expanded in Europe. Only 13% of the company's sales come from its international segment. The company has 146 locations in the United Kingdom and 22 in the Netherlands. With only one location in India, I would guess the company will expand there first. Look for Bright Horizons to continue to acquire smaller companies to increase its international presence.

5. Revenue increasing - Due to the continued expansion of locations, Bright Horizons continues to see its revenue increase. The company has strong gross margins of 15-25%. Two of the company's goals concern increasing revenue (sustain annual price increases, increase utilization). Bright Horizons raises their amount charged to customers each year and is also working on making sure centers are as close to 100% full as possible.

6. Leader in category - Unlike other childhood centers, Bright Horizons focuses on employers as a specialty. In this field, Bright Horizons is the leader and will stay ahead of the game by opening new centers and acquiring smaller companies.

Shares of Bright Horizons sold 10.1 million shares at $22 each. This was higher than the expected $19-$21 range the company sought. Bright Horizons made $222 million on the offering with the sale of 16% of shares. The $22 price gives the company an enterprise value of $2.1 billion. The company is expected to repay senior notes with 13% interest with proceeds from the IPO.

Bright Horizons will likely see a big trading day Friday. Shares will open higher due to demand and should only be bought at the right price. I see shares approaching $25-$30 within six months and would consider buying under $24.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.