Four Unique Ways to Play the Baby Boomer Market

Includes: CCL, COH, DEO, WTW
by: Larry Bellehumeur

The reality is that each second, we all get older. All the money in the world will not turn back the inevitable biological clock. This fact doesn't stop millions of baby-boomers from trying, however. This is obvious by the amount of plastic surgery, beauty care and ED products being sold. I'm starting to wonder….how does one benefit from the emerging baby-boomer trend?

Over the past few years, we've heard all about how one should invest in funeral homes, health care and pharma companies, as these will all be needed by the growing elderly population. While this will eventually be true, it is important to point out that the largest part of the baby-boom is not yet at the age to need these things to a large degree. Most of the baby-boomers were born between 1955 and 1963, meaning that they are mostly in their "empty-nest years". This is the time when people have money to spend and time to spend it…, where might they spend it?

Here are 4 unique ways that one can play this demographic trend:

1) Weight Watchers (NYSE:WTW)

With age, many people tend to add a few extra pounds onto their waistlines. "Spare tires" tend to lead to health problems, such as elevated risks of diabetes and heart attacks. As well, the baby-boomers have tended to be more concerned about "aging gracefully" than their predecessors. This is obvious, based on the amount of advertisement done by beauty care companies using spokespeople who are in this age bracket (anyone else a bit sick of seeing Diane Keaton on TV?).

While there are definitely other choices in this space, Weight Watchers is the dominant player. It has a good history of increasing its earnings, and provides relative safety in turbulent times. The stock generates a fair amount of free cash, and trades at a reasonable 14.5x its estimated earnings for the current year. This one should see its former high of $55 over the next 12 months.

2) Diageo (NYSE:DEO)

As people get older, then tend to drink less alcohol. However, they do tend to drink better. Consumption of fine spirits and wine tend to increase as a person gets older. This happens for a few reasons. First, people's taste often goes up with their disposable income, and with the kids out on their own, boomers have more money to spend. Also, boomers tend to enjoy quality in everything (this is shown by their tendency to shop in places that provide better service….take note, Home Depot (NYSE:HD)!).

One of the best ways to play this trend is through Diageo, which owns prestigious brands such as Johnny Walker, Baileys and Crown Royal. Volumes are increasing on all of these brands, as well as others such as Smirnov, Captain Morgan and Guinness. As well, Diageo is also seeing increased volumes from emerging countries as they increase their disposable income (not that this is part of the trend, just an added bonus!).

Diageo has proven to be very shareholder friendly, through stock buy-backs and its current dividend, which is just under 3%. Diageo is a cash flow machine, throwing off a couple of billion dollars a year. This stock is not dirt cheap, but at less than 15x 2008 estimated earnings, it is a good place to hide during these uncertain times. I suspect that this one should creep back towards its $90 range high that it saw late last year. This would be a return that anyone can "drink" to!

3) Coach (NYSE:COH)

Ok, this one might not make sense at first. Aren't we in a recession (or at least a time that feels like one)? Isn't an expensive handbag the last thing that people will need? Maybe, but it doesn't mean that people won't buy them. Boomers have more disposable income than most of us, and do appreciate the quality that a Coach bag delivers.

Coach is an extremely well run business, with effective management. The company has been careful to keep its debt to a bare minimum, and it has a return on equity (over 40%) that would make most companies more envious than those who want the newest bag that the company offers!

Coach has seen a big correction from its high of about $51, so most of the bad news is likely priced in. Sure, if there is a further drag on the economy, both domestically and internationally, this one still may have some downside. Coach is now trading at less than 13x 2008 earnings. This is a steal for a company with a strong iconic brand like Coach. Expect it to rebound to a more reasonable 15x to 16x earnings over the next 12 months, marking a return to north of $40 in the next year or so.

4) Carnival (NYSE:CCL)

Ok, will this one be a good bargain if oil prices spike back up to $150 again? Sure, this will hurt Carnival, just like other vehicle/vessel driven industries. However, Carnival has held up much better than the airlines, which have seen more dramatic spikes in their costs. Demographics have shown that people tend to take more cruises as they get into the 50's and 60's. With the incredible variety of cruises being offered, they are also starting to appeal to younger and more diverse markets. Finally, while this is not the purpose of this article, the percentage of emerging markets residents who take cruises is small, and growing fast.

Carnival is not an incredibly cheap stock when compared to some (trading at 14.2x current year earnings), but few stocks have the "moat" around their businesses that Carnival does. (It would cost hundreds of millions just to build one of the company's boats, and it has 85 of them). It should continue to see double-digit earnings growth over the next decade or so, as its market increases dramatically (allowing it to better pass on the higher fuel costs to its customers).

I suspect that Carnival will be a huge benefactor when the economy does pick up. It should see its former 52 week high ($52) sometime in 2009, making this one a "smooth sailor" to say the least.

Disclosure: No position.