The number of people aged over 70 will steadily increase in the coming decades – this isn’t just a fact, it’s a meta-trend you can profit from. The chart below (using 2011 data) shows how the baby boomers impact demographics and how that key demographic is about to retire.
Residual life expectancy at age 65 is 19 years for men and 22 years for women. That means that the average 65-year-old male – having survived the fast cars and other reckless acts of youth – is expected to live until 84. As a result, over the next 20 years, the proportion of elderly will increase as a percentage of the population. That fact is close to certain, but because it will play out over 20 years (rather than 3 or 5), short-term focused market participants arguably fail to give it full weight.
It’s no secret that the elderly spend a lot of money on healthcare. Indeed, for my grandmother, it is the single biggest cost. It’s not discretionary, and she will continue to pay until the end. Superstar healthcare stocks like CSL Limited (ASX: CSL) are very rarely undervalued, but smaller healthcare companies like the two below occasionally become very attractively priced.
Paragon Care Ltd. (ASX: PGC) supplies surgical instruments, medical equipment and consumable medical products, largely to hospitals. It is therefore somewhat dependent on the unpredictable flow of orders from hospitals. Because the company is basically a middleman, it also risks being cut out of the equation altogether, if it increases margins by too much. This isn’t the kind of superstar business I generally look for.
On the other hand, the company tends to grow by acquisitions, and this makes sense if that strategy generates synergies and economies of scale. At the current share price of 29.5c, the company trades on a FY 2015 P/E of less than 10. After raising capital at 37c the company has a reasonably strong balance sheet. Furthermore, the company recently signalled the intention to make another acquisition in the short term (using debt). The business is a bit too unpredictable for me at current prices, but I’d be interested should shares become a bit cheaper, or if the new acquisition has particularly strong growth prospects.
Pulse Health Limited (ASX: PHG) is a potential client of Paragon, as it owns six largely regional, private hospital businesses across NSW and Queensland. Like Paragon, the company has grown by acquisition in the past. However, with hospital utilisation rates at around 65%, the key is to improve occupancy.
If the services provided are quality, that problem should take care of itself over time, and the company’s profits should steadily increase, even without any new acquisitions. At a share price of 55c, Pulse Health Group is trading on a FY 2015 P/E of around 25 to 30. I’d need a more attractive price to buy shares myself, but the potential to expand existing sites, improve occupancy and even buy new locations is promising over the long term. I also think the company could expand its community care operations, and it helps that it is relatively small, with a market capitalisation of just $90 million. That means that it is not yet on the radar of the larger fund managers.