Goldman Sachs and Nicholas Financial: Benefiting from Aging Baby Boomers

Includes: GS, NICK
by: Erik Dellith

Federal Reserve Chairman Ben Bernanke this week warned Congress of potential budgetary problems that may arise as baby-boomers age. Warnings aside, this demographic shift can be a bright spot for investors, who would do well to consider some of the sectors and companies that stand to benefit from the aging of this group. Among the possibilities: Goldman Sachs Group, Inc. (NYSE:GS) and Nicholas Financial Inc. (NASDAQ:NICK).

People are living longer now than they have in the past, thanks partly to advances in medicine. According to data from the National Center for Health Statistics, the average life expectancy for someone (both sexes, all races) born in 1900 was 47.3 years. By 1950, this had increased to 68.2 years, followed by 69.7 years for someone born in 1960, while someone born in 2003 - the most recent date available - has a life expectancy of 77.5 years.

Of course, living longer also exposes people to increased incidences of various health problems, including cancer and diabetes. This suggests increased demand for healthcare products and services.

With the baby-boom generation -- that group of people born between 1946 and 1964 - expected to live longer after the typical retirement age, there is also increased demand for financial services and products so that people can save more. This brings to mind questions about how members of this group will spend their leisure time and where they will live.

Weighing these considerations, we went hunting for stocks that might benefit from the aging of the baby boomers. We started off by filtering for companies within the healthcare, financial, and services sectors. Within the financial arena, we focused on companies involved in consumer financial services, insurance (health, life, and miscellaneous), and investment services. And within the services sector, we included companies involved in personal services, real estate operations, and recreational activities. Focusing on these areas generated a list of 1,626 companies out of the more-than 8,850 names in the stock universe.

To narrow the list, we focused on the 109 names that recently appeared on at least one of the Reuters Select stock screens. (Click here for an Excel sheet comparing these companies.)

While a compelling investment case could possibly be made for any number of these stocks, we decided to reduce our list by focusing next on growth characteristics. We filtered for companies where the revenue and earnings-per-share [EPS] growth rates were above the averages for their respective industries over two time periods: the trailing 12 months [TTM] and last five years. This dropped our list from 109 to 10 names, including Goldman Sachs Group, Inc. (GS) and Nicholas Financial Inc. (NICK).

1 TTM Growth Rates

Goldman Sachs's (GS) strong revenue and earnings growth not only enabled it to meet our criteria here, but also helped the top-tier investment bank to register on three Reuters Select growth screens: Accelerating EPS Growth, Relative Growth, and Sales Growth Leaders. The Accelerating EPS Growth screen is designed to highlight companies where the pace of earnings growth has been improving. As indicated below, Goldman Sachs's EPS growth rate in the TTM period is faster than its five-year pace, and its clip in the most recent quarter (MRQ) is faster yet. Further, these rates are considerably faster than the industry averages. Similarly, Goldman Sachs dominates the industry averages regarding top-line improvement. This helped the firm land on the Sales Growth Leaders screen and on the Relative Growth screen, which filters for companies that have above-industry-average TTM revenue growth and MRQ earnings growth. The Relative Growth screen also looks for acceleration in the pace of earnings improvement.

2 Growth Rates

It is not uncommon for companies that are growing quickly to command premium valuations, but we don't want stocks that are too highly priced. Turning our attention to valuation, we filtered for companies where the price to earnings [P/E] and P/Sales ratios are below the industry averages. This left us with three names.

3 Valuation

Nicholas Financial's below-average P/E and P/Sales ratios also positioned the provider of automobile loans on the Reuters Select Relative Value screen. The screen is designed to highlight companies that are trading at reasonable valuations. As such, the screen is not as strict as our criteria above: Whereas we want below-average valuations, the screen requires that a firm's P/E and P/Sales ratios must be no more than 10 percent above the industry reading.

To narrow the list further, we turned our attention from valuation ratios based on TTM performance to valuation ratios based on expectations of future performance. Specifically, we wanted to focus on the company that had PEG ratios low enough to appeal to even the most die-hard value hunters.

PEG ratios are determined by first getting the forward P/E, which is the current stock price divided by the consensus of analyst estimates for EPS for the current year or for next year. The resulting P/E ratios are then divided by the consensus for the long-term EPS growth rate. Generally, more-conservative investors prefer to see numbers below 1.00.

At present, no analyst provides estimates to Reuters for Avatar Holdings, Inc. (AVTR), so we omitted it. This left us with two financial companies: Goldman Sachs Group, Inc. (GS) and Nicholas Financial Inc. (NICK).

Based on a current stock price of about $211, and a consensus EPS estimate of $19.04 for fiscal year ending November 2007, Goldman Sachs has a forward P/E of about 11.1. If we take into consideration the expected EPS of $20.41 for fiscal 2008, the forward P/E is about 10.3. Divide these ratios by the long-term earnings growth rate of 15.3 percent, and we see that Goldman Sachs has PEG ratios of roughly 0.72 and 0.68, respectively.

The valuation story is not too different with Nicholas Financial, which has a current stock price of about $11.55. The one analyst providing estimates to Reuters believes fiscal year ending March 2007 EPS will hit $1.12. This yields a forward P/E ratio of 10.3. This analyst looks for fiscal 2008 EPS to rise to $1.20, giving a forward P/E of 9.6. At present, the analyst has also penciled in an EPS growth rate of 15 percent going forward. Nicholas Financial, then, has PEG ratios of 0.69 and 0.64, respectively. This also helped the company clear a hurdle of the Relative Value screen: The screen requires companies to have PEG ratios below 2.00.

Since both Goldman Sachs and Nicholas Financial have passed our additional testing and have appealing valuations, we decided to highlight both.

Disclosure: At the time of publication, Erik Dellith owned shares of GS. He did not directly own shares of any other company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by