Newly public child care services provider KinderCare Learning has a standout strategy that could boost its profits well into the future, according to Goldman Sachs. Analyst George Tong initiated coverage of KinderCare with a buy rating and 12-month price target of $41, suggesting shares can climb more than 44%. The company, which went public on the New York Stock Exchange on Oct. 9, is the largest provider of early childhood education services in the U.S. with the capacity to serve more than 210,000 children across roughly 2,500 sites. Goldman Sachs led the KinderCare initial public offering at $24 a share last month. “KinderCare has differentiated positioning through its community-based center focus and diversified demographic targeting, which we expect to fuel an attractive revenue growth outlook,” Tong said in a Sunday note to clients. The company has leaned into the new work-from-home dynamic, which has fueled its center occupancy rates to 71%, above pre-Covid levels of 69%, Tong noted. It’s targeting occupancy rates of 80%, he added. “We expect healthy medium-term margin expansion at KinderCare from rising center occupancy rates, efficiencies and mix,” Tong said in the Sunday note to clients. “As KLC establishes a strong public market track record of execution and de-levers its balance sheet, we see room for its valuation multiple to expand.” The company also serves families across all income demographics, including those that get subsidies for child care, which broadens its addressable market. That unique targeting also provides the company with a “stable and growing stream” of government child care subsidies through the Child Care and Development Block Grant, which makes up 32% of KinderCare’s total revenue, Tong said. Further revenue catalysts for KinderCare are its predictable annual tuition increases of between 3% and 4% in a price inelastic market, a pipeline of new center openings and growth from employer-sponsored centers and Champions before- and after-school sites, the analyst continued. Goldman estimates the domestic child care industry is worth about $76 billion, and predicts it should grow at an annual rate of about 6% long term. Tong expects KinderCare revenue to top that, rising between 6% and 9%, as it makes acquisitions of smaller providers and further cements its advantages as a large-scale player. KLC YTD mountain KinderCare stock this year.
