Using the 2 Stage Free Cash Flow to Equity, Bright Horizons Family Solutions fair value estimate is US$126
Current share price of US$105 suggests Bright Horizons Family Solutions is potentially trading close to its fair value
Analyst price target for BFAM is US$114 which is 9.1% below our fair value estimate
How far off is Bright Horizons Family Solutions Inc. (NYSE:BFAM) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$231.9m
US$269.6m
US$297.7m
US$321.5m
US$341.8m
US$359.3m
US$374.8m
US$388.8m
US$401.7m
US$413.9m
Growth Rate Estimate Source
Analyst x3
Analyst x3
Est @ 10.41%
Est @ 8.00%
Est @ 6.32%
Est @ 5.13%
Est @ 4.31%
Est @ 3.73%
Est @ 3.32%
Est @ 3.04%
Present Value ($, Millions) Discounted @ 6.8%
US$217
US$236
US$244
US$247
US$246
US$242
US$236
US$229
US$222
US$214
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$2.3b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.8%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$9.6b÷ ( 1 + 6.8%)10= US$4.9b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$7.3b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$105, the company appears about fair value at a 16% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
NYSE:BFAM Discounted Cash Flow June 2nd 2024
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Bright Horizons Family Solutions as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.8%, which is based on a levered beta of 0.964. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Bright Horizons Family Solutions
Strength
Earnings growth over the past year exceeded its 5-year average.
Debt is well covered by earnings and cashflows.
Balance sheet summary for BFAM.
Weakness
Earnings growth over the past year underperformed the Consumer Services industry.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Current share price is below our estimate of fair value.
Threat
Annual revenue is forecast to grow slower than the American market.
What else are analysts forecasting for BFAM?
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Bright Horizons Family Solutions, we've compiled three fundamental elements you should assess:
Risks: To that end, you should be aware of the 2 warning signs we've spotted with Bright Horizons Family Solutions .
Future Earnings: How does BFAM's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
主要见解
使用二阶段自由现金流至股东权益法,Bright Horizons Family Solutions的公允价值估计为126美元。
当前的105美元股价表明Bright Horizons Family Solutions可能接近其公允价值。
BFAM的分析师目标价为114美元,低于我们的公允价值估计9.1%。
Bright Horizons Family Solutions Inc.(纽交所:BFAM)的内在价值距今相差多少?使用最近的财务数据,我们将查看该股票是否定价合理,通过将公司的预测未来现金流折现为今天的价值来实现。 这将使用折现现金流(DCF)模型完成。其实并不需要太多复杂的计算,虽然这看起来可能很复杂。
公司的估值方法有很多种,所以我们要指出DCF并不是每个情况下都是完美的选择。如果您想了解更多有关折现现金流的内容,可以详细阅读 Simply Wall St 分析模型的推论。