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How To Seize A Gran Oportunidad; Capitalize On The Growing Latino Market With Health-Care, Financial, And Media Companies That Target These Consumers.
By Brian Grow
27 December 2004
Any economist will tell you ``demographics is destiny.'' If you look at the Hispanic population, nearly 40 million strong and growing almost three times faster than the U.S. population as a whole, there's no question it's destined to be a powerful economic force (table, page 108). In fact, it already is. Incomes for Hispanics still trail the national average, but they are gaining fast. Total disposable income is up 29% over the past three years, and it's expected to top $1 trillion by 2010. Serving a market that's fast-growing in both size and wealth presents a huge opportunity for many companies and their shareholders.
The best way to put this salsa in your portfolio is to invest in health-care, financial, and media companies that target Hispanic consumers. ``These firms' revenues are growing three to four times faster'' than their industry averages, says Jay C. Garcia, managing director of Samuel A. Ramirez & Co., a New York investment firm.
IPOs ON THE WAY
In fact, hot picks in the Hispanic market are becoming easier to find. While most publicly traded companies founded by or receiving more than half their business from Hispanics are still covered by regional analysts, they are drawing the attention of big investment banks. The reason: More than 27,000 Hispanic companies now have revenues of $1 million or more, and dealmakers are salivating at the prospect of future initial public offerings. Twenty-two have gone public over the past 20 years, from Cuban-owned communications equipment supplier MasTec Inc. to Florida-based radio empire Spanish Broadcasting System. Eleven of those are now featured in the Ramirez & Co. Hispanic index, a benchmark for Hispanic stock performance with a stellar record. The RCHI has risen 177% since its inception in 2000, compared with a 17% decline in the Standard & Poor's 500-stock index. ``It's a great time to invest in what is the second-largest demographic shift in the country after the retiring baby boomers,'' says Carlos L. Signoret, a partner in Hispania Capital Partners, a Chicago private-equity firm specializing in Hispanic companies.
The hottest Hispanic-run company in terms of revenue, earnings, and stock price growth is Molina Healthcare Inc., a provider of health plans and clinics for Medicaid-eligible citizens, says Ramirez & Co.'s Garcia. Chronically underinsured after coming to the U.S. because few Latin American countries have a tradition of health insurance, low-income Spanish speakers account for more than a third of the Medicaid population, says Molina Chief Executive Officer J. Mario Molina. With more than 300,000 new Hispanic immigrants entering the U.S. each year, the ranks of Hispanics using government-sponsored health care are growing rapidly. That has helped push membership in the Long Beach (Calif.) health-maintenance organization up 40% this year, to about 800,000 customers paid for by Medicaid. The stock trades near a 52-week high. But with a price-earnings ratio of 19 and earnings expected by analysts to grow 22.5% in 2005, it remains relatively cheap. ``Molina is becoming the Hispanic health-care provider of choice,'' says Garcia.
If health care for the poor seems too risky, try banking. By offering financial services such as mortgage lending and bank accounts, San Juan (Puerto Rico)-based Doral Financial Corp. is able to tap two big trends: the rising rate of Hispanic homeownership and the number of new Latino immigrants eager to keep their cash in the bank instead of under the mattress. Doral already dominates the home-loan market in Puerto Rico. Doral's recent push into New York -- where it plans to target stateside Riquenos as well as Dominicans and other nationalities -- gives the bank substantial upside potential. Analysts expect Doral will earn $4.50 per share next year, up from $3.88 in 2004. That's a 16% jump, yet the price-earnings ratio for 2005 is just 10.2. Says Audrey L. Snell, senior vice-president and head of research at New York investment bank Brean Murray & Co.: ``Their p-e is puny, and it doesn't reflect the firepower and momentum of the business.''
TUNING INTO UNIVISION
Perhaps the best-known Hispanic-oriented investment is Univision Communications Inc. The largest Hispanic media conglomerate in the U.S. reaches 98% of the Latino population. The company has been catering to Spanish speakers for decades with a mix of supercharged soccer games, campy telenovelas, and glitzy variety shows. Univision profits have grown a total of 73.4% in the past five years.
Now may be the time to buy Univision. The stock is trading near a 52-week low on concerns that growth could slow in its television unit. But with profits up 74% in the third quarter year-over-year, to $73 million, some investors say those worries are overblown. ``Univision is huge and has a powerful future,'' says Federico F. Pena, former Transportation Secretary and Energy Secretary in the Clinton Administration, who now oversees Hispanic investments for private-equity firm Vestar Capital Partners.
Pena's bullish on Univision and TV station operator Entravision Communications Corp. because their ad revenues will grow faster than the industry's. The Hispanic media get only 4% of total ad revenues, far below the 14% Hispanic share of the total population. He's betting that share will grow for all Hispanic media. ``The ad revenues being placed in these [media] companies are not yet commensurate with their viewing audience,'' says Pena.
Not all the plays are companies with Hispanic roots. Analyst David J. Kostin of Goldman, Sachs & Co. says Avon Products Inc., longtime No. 1 cosmetics purveyor in Latin America, is profiting from the Hispanic boom in the U.S. Nearly 30% of U.S. Hispanic women buy cosmetics through direct-to-home sales, vs. 21% of non-Hispanics. That preference has helped push Avon sales to Hispanics up 11% in 2002, to $330 million, or 5% of Avon's $6.2 billion in worldwide sales. (Avon stopped disclosing sales to U.S. Hispanics last year.) This fall the company scored Mexican actress Salma Hayek as a new global pitchwoman. Despite warning on Dec. 8 that domestic sales will struggle overall in the next year, Avon executives expect U.S.-based Hispanics to continue buying in a big way.
Kostin also says large banks with a high share of deposits in Hispanic havens such as California, Texas, and Florida will benefit. In that category, Bank of America Corp. and Wells Fargo & Co. stand out. ``All these companies are riding the Hispanic wave,'' says Monika I. Mantilla, head of the capital committee at the New America Alliance, a Latino business group, and principal in an investment firm with $2.5 billion under management .
As Wall Street's big guns turn their attention to Hispanic stocks, the sector could become more volatile. Still, those who want to participate in this important demographic trend should buy in and hang on for the ride. Investors should have some buena suerte in this sector.
Hispanics As An Economic Force
Companies that serve Latinos may be good bets. Here's why:
40 million people, growing 2.9% per year, vs. 1% for total U.S. population
34.4% of the Hispanic population is under 18, vs. 22.8% for non-Hispanics
Hispanics' disposable income is up 29% since 2001, to $652 billion, and will top $1 trillion by 2010
More than 27,000 Hispanic-owned companies now have revenues of $1 million or more
Data: U.S. Census Bureau, Goldman Sachs, Ramirez & Co., University of Georgia, Vestar Capital Partners
Spice Up Your Portfolio
COMPANY/ PRICE* PRICE-EARNINGS
AVON PRODUCTS AVP 39.53 20
U.S. cosmetics giant, also No. 1 in Latin America, profiting from sales to immigrant Latinas
DORAL FINANCIAL DRL 45.88 10
Already tops in the Puerto Rico mortgage market, now expanding to Hispanic homeowners on the mainland
MOLINA HEALTHCARE MOH 45.50 19
Runs health plans and clinics for the poor; profits expected to jump 20% next year
POPULAR BPOP 27.03 13
Now the No. 31 bank in U.S., selectively gobbling up banks in states with lots of Hispanics
UNIVISION UVN 27.90 32
Grand champion of Hispanic media companies and still set for earnings to grow 20% next year
* Dec. 10
** Based on consensus earnings forecasts for the next 12 months