Stocks to Ride the Demographic Tide


Demography, it is sometimes said, is destiny. The growing U.S. population can be interpreted as a sign of national health, but how will that play out for companies? There's no crystal ball and populations don't just grow over time, they change.

Nonetheless, there are some widely held estimates of what the U.S. population profile will look like well into the 21st century. The populations of sunny states such as Florida and Texas are growing much more rapidly than the frosty, industrial zones of New England and the Rust Belt. Meanwhile, ethnic minority populations, notably Latinos and Asian Americans, continue to increase. And as the population grows it will also age, thanks to advances in health care.

As part of our look at the U.S. as its population heads toward the 300 million mark, Five for the Money suggests some companies and industries that appear well-positioned to thrive during the demographic shifts. Investors, however, should remember that population shifts typically take longer than Wall Street analysts like to look into the future. Their favorable positioning is not going to send EPS skyrocketing for the coming quarter.

Of course companies can sour and new competitors pop up in the demographic blink of an eye. In that context, some of these stocks are best thought of as representative examples in industries to watch.

1. D. R. Horton

With the softening housing market, it may not be the best time to take the plunge now on a major homebuilder. But looking beyond the current jitters, however, D. R. Horton (DHI) and its competitors could prosper. First, the number of Americans is expected to continue growing even after it reaches 300 million. The census bureau projects that the U.S. population will top 400 million before 2050. Those additional citizens are going to need houses.

Standard & Poor's rates the stock a hold reflecting its position as the U.S.'s largest homebuilder in the U.S. and the shaky real estate market. It notes that the company could improve shareholder value by using "most of its operating cash flow for purposes other than land investment, namely, share repurchases and debt reduction." But looking ahead, the company's geographic diversity could pay off, as it already operates in booming Sunbelt and West Coast states.

2. Starbucks

As members of the generation that fueled the later part of their careers with grande lattes ease into retirement, they're going to have a lot more spare time (they hope). In all likelihood they'll still spend much of it at Starbucks (SBUX).

According to a recent Morningstar report by John Owens, the coffee chain has almost 9,000 U.S. locations, compared with the nearest competitor Caribou Coffee's (CBOU) less than 500. In addition to sheer ubiquity, Starbuck's emphasizes book events and music CDs that appeal to boomer tastes as a way to cement their loyalty.

Perhaps more importantly the report notes that "its cafes do not sell just a cup of coffee, but an experience." Even as same-store sales growth has slowed somewhat, Starbucks is continuing to open stores at a frenetic pace. Though Starbucks still does most of its business in take-out, Owens says the company is by far the leader in providing consumers with a "third place," an alternative to work and home.

In that arena he says investors shouldn't rule out competitors like Panera Bread (PNRA)

and even McDonald's (MCD), which is trying to get customers to stick around (see BusinessWeek.com,5/15/06,

"McDonalds' Tricky Makeover").

3. Novartis

Predicting drug approvals far into the future is chancy. It's hard enough to predict which current product pipelines will get the nod from regulators. Nonetheless, as the population grows older, folks will need drugs for a variety of things: chronic illnesses such as cardiac disease and pain management, to give a couple of examples. Swiss health care giant Novartis (NVS) is among analysts' favorites in the sector.

Standard & Poor's gives Novartis a five-star rating due in part to the strengths of its development pipeline, which at the end of 2005 had 50 "late stage projects" including drugs for diabetes and cardiac disease—two conditions prevalent in older populations.

In another typical report Jyske Bank of Denmark writes that the company's generic pharmaceutical business makes it "well balanced for the patent expirations which will hit the industry in the coming years." The company also could get a boost from populations that continue to grow at the other end of the age range: It owns Gerber.

4. Grupo Televisa

Mexican outfit Grupo Televisa (PI)

is the most broad-reaching media company in the Spanish-speaking world with holdings in television, pay TV, and publishing. In coming years it could benefit from the projected population growth in Latin America and the increased prevalence of Spanish-speakers in the U.S.

In addition to broadcasting throughout the Spanish-speaking part of the Americas and Spain, the company's content reaches the U.S. market through Los Angeles-based Univision Communications (UVN)

in which it holds an equity stake. The two groups are enmeshed in a long-running dispute after Televisa was rebuffed in an acquisition offer for Univision in favor of an offer from a group of private investors.

Even so, with its popular content, the company believes it will be able to maintain U.S. distribution with or without Univision, according to a recent S&P report. The research group and J.P. Morgan (which does banking for Televisa) both view the stock more favorably than its U.S. partner. In a July report, J.P. Morgan wrote that Televisa shareholders could ultimately benefit from a sale of Televisa's Univision stake and calls the company an "undervalued stock with very promising fundamental prospects."

5. Manor Care

The aging population is going to need new drugs and medical devices, but they're also going to need people to care for them. Manor Care (HCR), a company that offers services in high-demand areas such as home care, nursing, assisted living, and hospice might be a way for investors to benefit as the population turns gray.

Though the demographic trends are very favorable, the business outlook is less clear. Standard & Poor's rates the stock a hold. It writes in a recent report that "federal and state payors are likely to look for ways to cut reimbursement levels due to overall budget deficits." That's a tough condition for a company like Manor Care that receives more than half its revenues from Medicare and Medicaid. The solution is to offset budget cuts by boosting occupancy levels in its facilities, S&P believes.

Despite the obstacles facing the company, a recent Morningstar report says the company has an advantage "compared with the average small facility across the street," because of the diversity of services it offers. Still the difficulties it faces show that while demographic shifts can present opportunities, those same currents can also place bumps in the road. But as the U.S. grows and changes, smartly positioned companies can reap the rewards.


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