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3 alternative stocks for the baby boomer megatrend

There are plenty of companies well placed to benefit from the rising ranks of boomers.

Investment stories about the coming exodus of baby boomers from the full-time workforce usually focus on healthcare, medical devices and aged care stocks. Less considered are stocks that will benefit as millions of boomers transition to a different lifestyle.

Baby boomers I know are a long way from needing retirement villages, hip replacements or regular visits to the doctor. They go to the gym, travel overseas and operate their self-managed superannuation fund (SMSF). Some launch consultancies or start-ups or work part-time.

The baby boomer cohort in, or near, retirement will be so large in the next decade that there will be several lucrative segments within the so-called “ageing population” for companies to target.

It’s a huge trend. Almost 5.6 million Australians are baby boomers (born between 1945 and 1964). By 2030, every boomer will be 65 or older, triggering social, economic and demographic change. Not to mention added pressure on the country’s health and age pension systems.

The baby boomers, about a quarter of the population, own just over half of the country’s wealth, thanks largely to rising property prices in capital cities. On some estimates the asset value they control will top $3 trillion in the next decade.

I considered a range of stocks for this story, from travel agents to airlines, accommodation providers, SMSF service providers (such as Class) and automotive groups. I was tempted to add a funeral operator to the list, but today’s baby boomers, healthier and more active than previous older generations, won’t be needing those services for decades, on average.

As always, investors should focus on company fundamentals and valuations first, rather than solely on top-down trends. The market is aware of megatrends and prices them into stocks well in advance. Still, investors have a habit of underestimating the strength and duration of megatrends, such as millions of Australians reaching retirement age within 12 years.

Here are three stocks to watch:
 

1. Flight Centre (FLT:ASX)

I’ve been bullish on the travel operator for a few years, having included it in the Switzer Report at $31.65 in December 2016 when the valuation fell too far. Flight Centre now trades at $61.82.

Three factors drove my view. First, the thematic of more Australians, young and old, travelling overseas is a boon for listed travel agents. Second, Flight Centre is doing a good job adding to, and upgrading, its mobile technology (once a weakness) to compete with online rivals. And third, there’s more value in Flight Centre’s blended (physical store/online bookings) model than the market realised.

At Flight Centre’s valuation low, the market assumed the company would succumb to online rivals, thanks to its costlier bricks-and-mortar store network. The company’s blended advice model looks well suited to baby boomers, who still value in-store travel advice and support.

Young consumers might book their entire trip online but older ones, myself included, often book part of their trip online and the rest through a travel agent. Or use the agent for all bookings. They don’t want to risk buying a pricey overseas holiday online without advice.

Flight Centre looks fully valued for now after recent price gains. Any sustained price weakness would be an opportunity for investors to add one of the higher-quality Australian mid-cap companies to their portfolio.
 

Chart 1: Flight Centre Travel Group (FLT)

Source: nabtrade

 

2. Servcorp (SRV:ASX)

The serviced office provider might seem an odd choice for this list. As more baby boomers exit the full-time workforce and corporates downsize, demand for office space could moderate. Also, Servcorp shares slumped after a nasty earnings downgrade in early May.

To be clear, I would not buy Servcorp yet, even after its share price almost halved from the 2016 high. Longer term, Servcorp is leveraged to an interesting trend. As more baby boomers exit full-time work, particularly those who had senior roles in corporates, demand for serviced offices could strengthen. I know plenty of baby boomers who buy cheap office space after leaving their corporate job, as a base for a part-time consultancy, small business or start-up.

A jump in corporate redundancies could also support demand for serviced offices as displaced middle and senior managers buy cheap office or co-working spaces.

The move towards co-working spaces, where workers effectively rent a desk, is popular in the ‘gig economy’ and another tailwind for providers of serviced-office providers.

Servcorp is approaching value territory. Share valuation service, Skaffold, estimates the stock is 11% overvalued at the current price. A few broking firms that cover Servcorp have valuations ranging from $4.35 to $6.

Further, Servcorp has low debt, plenty of cash for a company its size and an expanding global footprint in a growth market. It is one for the portfolio watchlist in anticipation of further share price falls. The stock will look more interesting around $3.70.

Chartists will look for Servcorp’s price downtrend to plateau and a period of consolidation (sideways) activity to form, before the next uptrend.
 

Chart 2: Servcorp (SRV)

Source: nabtrade
 

3.  Apollo Tourism & Leisure (ATL:ASX)

I first wrote about the caravan group for this report at around $1.60 a share in November 2017. Apollo hit a 52-week high of $2.10 this year and has since eased to $1.62.

To recap, Apollo listed on the ASX through an initial public offering (IPO) at $1 a share in November 2016.

The company makes, rents and sells recreational vehicles (RVs) such as motor homes, camper vans and caravans. Its target market is older customers who want independent holidays. Apollo’s products are an excellent fit with baby boomers who want to explore Australia after leaving full-time work.

Apollo’s business model has three parts. First, the company has licence and distribution agreements with Winnebago and Adria in Australia and New Zealand. The target market is middle-age to retirement-age Australians – the so-called “grey nomads”.

The second part involves Apollo targeting domestic and international tourists who want to rent an RV. This, too, is a growth market as international travellers who have already visited Australia a few times seek do-it-yourself holidays.

The company is the largest provider of rental RVs in Australia and among the largest in New Zealand and the United States.

Apollo last year finalised its acquisition of CanaDream, a Canadian rental fleet operator, and recently bought well-known caravan brands from Fleetwood Corporation to expand its multi-brand portfolio and create manufacturing economies of scale.

The third component is the sale of new and ex-rental RVs through its own sales centre and selected dealers in Australia. Apollo sells new and ex-rental RVs in New Zealand and the United States through a network of external dealers.

Apollo, a micro-cap capitalised at $299 million, is not for the risk averse. The company is rapidly acquiring other businesses and brands and has high debt for its size. Apollo will need to maintain rapid revenue and earnings growth to service and reduce this debt.

There are several near-term challenges. The company in June noted some softness in Australian caravan sales and slower sales of used RVs because of a prolonged North American winter. Apollo said it expected earnings to be at the lower end of analyst estimates. The share price tumbled.

Long term, Apollo is building a strong position in RV rentals in Australia and overseas. It’s an interesting market as more baby boomers rent a vehicle for their road trip rather than buy an expensive caravan, motor home or RV. Watch the peer-to-peer caravan and RV-sharing community, here and overseas, rapidly grow in the coming decade.

Prospective investors might watch and wait for better value in the lead-up to Apollo’s full-year results, expected on August 21.
 

Chart 3: Apollo Tourism & Leisure (ATL)

Source: nabtrade


About the Author
Tony Featherstone , Switzer Group

Tony is a former managing editor of BRW, Shares, Personal Investor, Asset and CFO magazines and currently an author at Switzer Report. He specialises in small listed companies, IPOs, entrepreneurship and innovation and writes a weekly blog for The Sydney Morning Herald/The Age on small companies and entrepreneurs.