Although the conventional wisdom is that the choice to purchase a home is the most important and expensive economic decision the average person or couple will make, there is another choice that is even costlier and more important -- the choice to have children.
Raising children is an extremely expensive undertaking. This is particularly true if both spouses work and outside child care is necessary. One recent study found that annual child care costs varied by state, ranging from $4,863 to $16,430 per child. In addition, the Census Bureau reported in 2011 that child care costs have increased dramatically since the 1980s.
No matter how you slice it, this is one huge expense. The fact that the rising costs for families hasn't translated into increased salaries for child care workers (per the Census Bureau's report) can mean only one thing: Someone is making huge profits in the child care business. After recovering from the shock of these figures, I went to work to discover a way to profit from them.
The child care business is primarily a fragmented industry of small-time operators ranging from home-based centers to regional chains. However, a newly public player in the space has expanded its child care system internationally.
Specializing in employer-sponsored child care, Bright Horizons Family Solutions (NYSE: BFAM) had its IPO on Jan. 30. Boasting a market cap of $2.2 billion, Bright Horizons consists of 880 child care and early-education centers in 42 states and a variety of other nations, including India. It boasts the capacity to care for nearly 100,000 children, an increase of 13% from the same time last year.
The company's third-quarter results were strong: Revenue was up 15% from a year ago, to $309 million; adjusted net income soared 119%; and earnings per common share rose 75% after dilution and adjustments. In addition, operating cash flow in the first nine months of this year was just over $120 million, up from $93 million from the same period last year.
Bright Horizons is an active buyer of other child care centers, with one recent acquisition being Children's Choice, a chain of 49 employer-sponsored day care centers in the United States.
Share price jumped on the IPO date to a high of $28; the price then eased into the $38 range and consolidated between $34 and $38. Starting in November, shares started selling off down to the current $33 area.
Given the huge market, rising prices, strong fundamentals and Bright Horizons' dominance in the industry, why are shares presently selling off? This question perplexed me until I looked at insider activity. Since June, there has been nearly $84 million of insider sales -- and zero insider purchases.
While no one but the insiders themselves knows the reason for their selling, it appears that their moves are sending an ominous signal to investors. This kind of extremely lopsided equation with no insider buying is unusual, but I think the selling provides a great entry point in the current range.
Risks to Consider: In addition to the insider selling, investors need to keep in mind that child care is an extremely competitive industry. There are relatively low barriers to entry, and there's always the potential of a competitor introducing a superior program at a lower price. Always use stop-loss orders and diversify when investing.
Action to Take --> Buying between $31 and $34 with stops just below $28 and a 12-month target price of $44 provides a solid balance of risk and reward.