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Stocks that will ride the wave of immigration
The flood of immigration to the U.S. translates into a powerful market. Savvy investors are gauging growth prospects of companies that cater to U.S. populations of Chinese and Hispanic heritage.
By Michael Brush
Vigilantes worried about foreigners sneaking into the United States can send all the Minutemen they want to patrol the Arizona-Mexico border, but theres no denying one simple fact.
The U.S. is in the midst of the biggest immigration wave in history. And barring an overhaul of U.S. immigration policy -- which admits 1 million legal immigrants a year -- thats not changing anytime soon.
So while Americans lock horns in the immigration debate, cool-headed investors are quietly figuring out what companies will benefit.
Some hold shares of leading Spanish-language TV and radio companies like Univision Communications (UVN, news, msgs) and Entravision Communication (EVC, news, msgs). Others own California-based banks catering to Chinese-Americans -- such as East West Bancorp (EWBC, news, msgs), Cathay General Bancorp (CATY, news, msgs) and UCBH Holdings (UCBH, news, msgs). Another play is First Data Corp (FDC, news, msgs). Its Western Union division is used by immigrants to wire money to families back home.
Before we take a closer look at these companies, heres an overview of why immigration -- whether you like it or not -- is a powerful investment theme thats here to stay.- Official estimates put the number of foreign-born U.S. residents at 33.5 million in 2003, or 12% of the population. But because of undercounting, a better estimate is 44 million, says Marcelo Suarez-Orozco, co-director of immigration studies at New York University. To put that in perspective, thats a third more than the population of Canada. Suarez-Orozco estimates that the contribution of Hispanics to the U.S. gross domestic product is bigger than the GDP of Mexico.
- The U.S. formally allows in about 1 million foreigners annually. But another 500,000 or more come in illegally and stay each year, estimates the Center for Immigration Studies, a Washington, D.C., think tank. So even if we cracked down hard on illegal immigrants, the foreign-born population will still grow rapidly each year.
- Most immigrants are Hispanic, Asian and Caribbean. They tend to be young and to have more children than the general population. Suarez-Orozco says one in four children in the U.S. is born into an immigrant family.
Now for the companies, which have made a point of serving existing ethnic groups and stand to experience outsize growth because immigration is helping to increase these populations faster than the population at large.
Spanish-language media companies
Univision is the leading Spanish-language media company -- dominating major markets like New York, Los Angeles, Miami and Chicago. Entravsion is in smaller but faster-growing markets like Tampa and Orlando in Florida, El Paso, Texas, Denver and Phoenix. Univision and Entravision have alliances -- and share programming -- around the country.
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Hispanics already are the largest minority in the U.S., about 40 million strong. That fact is not lost on advertisers, who are certain to spend more of their budgets at outlets such as Univision and Entravision.
The Hispanic population is growing six times to eight times faster than the general population in the U.S., says Larry Haverty, a media analyst at Gabelli Asset Management, which owns shares of the two broadcasters. The U.S. Census Bureau forecasts the number of Hispanics will grow by 20% by 2030. Meanwhile, Hispanic buying power should increase more than 30% by the end of this decade, to $1 trillion from $750 billion, estimates Legg Mason Wood Walker analyst Sean Butson.
Next, Hispanic households tend to be younger. Advertisers love this, because it means they are less likely to have hard-wired brand loyalties, says Wachovia Capital Markets analyst Jim Boyle.
The Spanish-language channels should also be able to raise the rates they charge advertisers. Ad rates are 20% to 30% below the rest of the market. But mainstream media companies are launching Hispanic channels, which will help close the ad-rate gap because the companies arent used to accepting discounted rates for air time, says Walter Ulloa, chief executive at Entravision.
The bottom line: Hispanics account for about 8% of U.S. consumer spending. But only 3% of corporate ad budgets in this country target this group. Expect that imbalance to even out over time -- supporting above-average revenue growth at Univision and Entravision.
The stocks of these two companies typically get knocked for being too expensive. But they've fallen along with the market recently and now look like decent buys. Univision and Entravision now sell for 16 and 20 times trailing pre-tax cash flow, says Haverty. Thats more than the 12 times trailing pre-tax cash flow multiple at large English-language media companies. But youre getting more than twice the growth rate.
Mainstream media companies have pre-tax cash flow growth in the 8% to 12% range -- compared to 20% for Univision and 15% for Entravision.
One risk for Entravision is that Univision owns more than 30 million shares of the company. The problem for Entravision is that Univision has to sell around half that position by March 2006, according to an agreement struck with the Department of Justice when Univision bought another Spanish language broadcasting company.
Banks catering to Chinese-Americans
The Chinese-American population is growing at a rapid clip. It was up by more than 50% in the 1990s. And about 40% of Chinese-Americans live in California. So its no surprise that three banks catering specifically to this group -- East West Bancorp, Cathay General Bancorp and UCBH Holdings -- are based in the Golden State.
While generalizing about cultures can be a minefield, bank analyst Brian Conn, of Sandler O'Neil & Partners., says some statistics show why Chinese-Americans are profitable bank clients. Compared to the general population, Conn says, this group has higher savings rates, higher employment levels and higher education levels. Chinese-Americans also have a strong entrepreneurial spirit, an affinity for owning real estate and an appreciation for personal relationships in business.
These qualities help explain why some California banks take special steps -- like hiring bilingual staff -- to win over immigrants' business.
Since last November, the three Chinese-American oriented banks have sold off anywhere from 20% to 30%. Investors are worried theyll be hurt by slower growth after years of solid gains and by rising interest rates. At this point, theyre beaten down enough and they look like solid buys for two reasons.- First, even though theyre slowing down, these banks still have built-in China-related growth as the Chinese immigrant population keeps growing, says Citigroup Smith Barney analyst Michael Diana. Analysts are looking for 13% annual earnings growth at Cathay over the next few years, 14.8% at UCBH and 16% growth at East West Bancorp.
- Next, while many banks are hurt when interest rates rise -- because the cost of their funds go up while long-term loan rates are locked in -- thats not the case with these three banks. They all have enough floating-rate loans that they actually stand to make more money as interest rates go up. Earnings on floating-rate loans will increase more than the interest rates the banks pay depositors.
Cathay and East West Bancorp are the strongest in southern California -- where two-thirds of the states Chinese-Americans live. Cathay is reaching out most aggressively to Chinese-Americans outside of California. And East West Bancorp is pursuing non-Chinese-American customers the most aggressively. The opportunity for growth in California is still tremendous, says Julia Gouw, finance chief at East West Bancorp. Her bank is the third largest commercial bank with headquarters in Los Angeles. Up to 90% of the bank's consumer clients are of Chinese descent.
Sending money home
Immigrants dont forget the folks back home. In fact, they send them lots of dinero. An estimated $18 billion to $20 billion goes to Mexico alone each year. To send money home, many immigrants turn to Western Union, a division of First Data Corp.
The companys stock is trading near 52-week lows, for a couple of reasons. First, a big piece of First Datas earnings comes from processing electronic payments. It lost a lot of this business when J.P. Morgan and Chase merged and moved payments-processing in-house. Next, Western Unions first-quarter results were a disappointment because of an unusually soft January and February. Meanwhile, theres a threat from major U.S. banks like Citigroup (C, news, msgs) and Bank of America (BAC, news, msgs) as they take steps to move in on Western Union's wire transfer business to Mexico.
But Western Union money transfers rebounded in March and April. And it is branching out in India and China, where transaction growth is in the 60% range. This should help support medium-term annual earnings growth of 12% over the next several years, says Mark Petrie, an analyst with Hokanson Capital Management in Solana Beach, Calif., which owns shares in First Data. He thinks that kind of growth will move First Data stock to $48 price in 12 to 18 months. The shares recently traded for $37.50.
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