With the market heavily focused on aging population, it’s missing an even bigger opportunity in the coming baby boom.
Thanks to the surge in births after World War II, the United States population is rapidly aging. These baby boomers are helping propel companies in health care, pharmaceuticals, retirement communities and other sectors.
But the hidden population play going forward isn’t the aging baby boomers. Rather, there is a new baby boom coming . . . and this one could be even bigger than the last one. In fact, according to a report by BCA Research last year, “Developed economies are about to experience a baby boom that will be bigger and longer-lasting than even the one that followed the Second World War.”
More affordable health and child care, along with flexible working schedules, are making child-raising easier. Yet with the birth rate having declined globally during the latest recession, much of the market has written off baby-related stocks. A Pew survey found that nearly one-in-four women had put off having a baby because of the weak economy. Now, some analysts expect pent-up demand will be uncapped and the next baby boom will grow as the economy continues to improve.
That improving economy means more women are finding jobs, also a positive for the birth rate. BCA found that female employment and the fertility rate are now positively correlated — where they were negatively correlated in 1980. That’s, in part, due to the rising wages for women and the affordability of child care.
The common counterargument to a resurgence of child births is that millennials are delaying having kids as they advance their careers or simply because they can’t afford it. So this means women are having kids in their 30s, versus their 20s.
But with medical advancements, it’s becoming possible to have more than one child later in life. And the number of American women within the prime childbearing age range (20 to 39) has been on the rise.
A paper by the Max Planck Institute found that American women born in 1979 are likely to have an average of 2.2 children, which is 10% more than in 1950. The other key is that there were only 150 million people in the U.S. during 1950. Today’s U.S. population of more than 315 million means far more women having more children than in 1950.
The baby boom of the 1950s was a boost to the economy; larger families brought rising demand for clothes, food, cars and homes. Overall, an increase in the population leads to economic growth. In the next wave, the biggest benefactors will be those companies that provide goods and services linked to babies and children.
Here are three companies positioned to profit from the next baby boom:
No. 1: Mead Johnson Nutrition (NYSE: MJN)
Mead Johnson is a major pediatric nutrition company and has a $20 billion market cap. Its key product is infant formula, manufacturing and selling the Enfa family of nutrition products. From an investment perspective, Mead Johnson is enticing given its presence across the globe, including Latin America, Asia and Europe. Around half of its sales are generated in Asia.
But Mead Johnson also has a strong and growing presence in the United States. Last quarter marked the first quarter in a number of years that Mead Johnson was the market leader in the United States formula market.
And Mead Johnson is bidding for more contracts with the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) in the Untied States. The WIC program provides formula to low-income pregnant and postpartum women — and over half of the infants in the United States are said to benefit from this program.
Mead Johnson is expected to grow sales at 5% this year and next, while top competitor Danone is expected to see flat sales. Mead Johnson also offers a 1.5% dividend yield.
No. 2: Carter’s, Inc. (NYSE: CRI)
Carter’s is an apparel company for babies and small children in the United States. Its two major brands include Carter’s and OshKosh, but it also owns the Child of Mine, Just One Year and Precious Firsts brands.
Carter’s sells its products via branded stores and discount retailers, giving it a large distribution network. It’s also focusing on increasing its presence in Target and Wal-Mart stores.
The recent results have also been encouraging for Carter’s; despite the weak apparel environment and rough winter, the apparel maker posted positive United States comparable store sales.
Carter’s trades at a forward P/E (price-to-earnings ratio based on next year’s earnings estimates) of 17 and offers a 1% dividend yield. Its expected earnings growth rate, above industry average, means that Carter’s is an attractively priced growth stock.
No. 3: Bright Horizons Family Solutions (NYSE: BFAM)
Bright Horizons operates 750 child-care and early education centers in the U.S. and abroad. While the company doesn’t offer a dividend yield, the competition in the space is limited. That means Bright Horizons enjoys impressive pricing power.
Bright Horizons also has a solid enough balance sheet to continue acquiring child care centers in anticipation for the baby boom. Meanwhile, the company is already performing nicely; its recent quarter had enrollment numbers up year-over-year, it increased prices and saw growth in its auxiliary services — including education advisory and in-home care services.
All in all, the aging population will be a great play, but the market already knows this. But many investors are overlooking the impact that the next great baby boom will have on the demand for nutrition products, clothing and child care.
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