As women earn more, fund managers buy shares of U.S. daycare company

(Reuters) – U.S. fund managers are finding a lot to like about finger-painting and naptime.

Fund ownership of Bright Horizons Family Solutions Inc, the only publicly traded daycare company in the United States, swelled 21 percent in the most recently reported quarter according to fund tracker Morningstar. That is an unusually high number for a company with a market cap of $2.7 billion.

The reason for the attraction? Bright Horizons, which operates more than 880 childcare centers, offers a unique way to target higher-income women as the job market improves, analysts say. Women represent the primary source of income for 40 percent of U.S. households with children, a record level, according to the Pew Research Center. In 2011, these households earned nearly $80,000, compared with a national median of $57,000 for all households with children.

Among the well-known funds that have increased their positions in Bright Horizons over the most recent quarter are the $5.5 billion Baron Small Cap fund.

As a result, shares of the Watertown, Massachusetts, company are up approximately 14.5 percent for the year through Sept. 17, nearly double the return of the benchmark Standard & Poor’s 500 index, and trade at a pricy 37 times earnings.

Analysts are also high on the stock, with eight of the 13 analysts tracked by Reuters recommending that clients buy shares, with the remainder having a “hold” recommendation.

Bright Horizons derives approximately 60 percent of its revenue from employer-sponsored daycare centers, which can range from a facility tucked into a sprawling corporate headquarters at clients such as Pfizer Inc to a standalone location at a suburban office park.

These centers help corporate clients such as Starbucks Corp and financial services companies including Goldman Sachs and JP Morgan attract and retain high-performing female employees, said Trace Urdan, an analyst at Wells Fargo Securities LLC.

Bright Horizons did not respond to requests for comment.

In targeting major employers to sponsor a daycare center, Bright Horizons’ strategy is to blanket an industry, essentially getting enough firms to provide on-site daycare benefits that all of its competitors feel compelled to offer the same benefit in order to attract talented employees. This has contributed to Bright Horizons’ slow but consistent growth rate, Urdan said.

Targeting upper-income parents also provides a cushion against the expansion of universal pre-kindergarten services in places such as New York, as many parents who opt for Bright Horizons would choose a private option over a government-run service, he said.

Yet the company’s success at signing large corporations in the past may mean that there is less “low-hanging fruit” for future growth, noted Jeffrey Silber, an analyst at BMO Capital Markets. Bright Horizons’ rampant growth rate could also make it a challenge to maintain quality, said Dan Dolev, an analyst at Jefferies who has a “buy” rating on the stock.

The company’s revenue grew 13.8 percent in its most recent fiscal year, following two years in which revenue grew by approximately 10 percent annually. Analysts estimate that the company will post revenue of $1.3 billion and earn $1.45 per share in its 2014 fiscal year, according to Thomson Reuters data.

The growth rate could increase as the Affordable Care Act spurs more consolidation in the $48 billion daycare industry as independent business owners sell their centers rather than provide health insurance to employees, said Dolev. The company has acquired an average of 25 centers a year over the last decade, accounting for about 20 percent of its annual revenue growth, he said.

Acquiring centers that provide care to children aged 2 and older also helps increase gross margins, he said. While the cost for caring for an infant consumes nearly 100 percent of tuition, the cost to care for a preschooler falls to just 75 percent of tuition, Dolev said.