FIVE U.S. STOCKS WITH LATIN HEAT HISPANICS AS A GROUP ARE GROWING--AND SPENDING--FAR FASTER THAN OTHER AMERICANS. THESE COMPANIES CATERING TO THEM COULD REWARD INVESTORS WITH SIZZLING RETURNS.
(MONEY Magazine) – Ana Hernandez, 23, a pharmacist's assistant, and her husband Jose, 21, a maintenance worker at Disney World, speak English while at work in Orlando. But when they learned they were expecting twins and decided to spruce up their house, they went shopping for a $4,000 personal loan at the local branch of Banco Popular, where the loan officer and almost all the customers were fellow Hispanic Americans. "It just made me feel more comfortable to go to a bank where I knew they could speak Spanish," Ana says.
Based in Puerto Rico, 104-year-old Banco Popular is a familiar name to immigrants from that island and elsewhere in the Caribbean. And it is rapidly acquiring and opening branches in Hispanic communities across the U.S., catering to an ethnic group whose buying power in the next five years is projected to grow seven times faster than that of Americans overall. As a result, stock analysts expect the share price of Popular, the bank's holding company, to climb 16% in the next 12 months.
Ana and Jose, who moved to Florida from Puerto Rico last year, represent a powerful demographic trend that could offer substantial profits to investors over the coming decades. The longstanding growth of Hispanic immigration is only part of the trend; what's been more striking lately is the rapid movement of Hispanic Americans into the middle class and the accompanying boom in their buying power. According to the Census Bureau, between 1995 and 1996 the typical Hispanic household enjoyed a 5.8% hike in income, after accounting for inflation--while Caucasian, African-American and Asian-American households saw their real median income remain flat. Similarly, housing experts at Harvard University recently reported a 16% jump in home ownership among Hispanics between 1993 and 1996. "And home ownership should continue to rise as lenders reach out to Hispanics more and more," says Josephine Louie, research analyst at the Harvard Joint Center for Housing Studies.
No wonder the mortgage lenders at Banco Popular are smiling so broadly these days. Theirs is one of five companies (all traded on the New York and Nasdaq exchanges and described in detail below) that stock analysts and mutual fund managers consider well positioned to profit from the spending boom among America's Hispanics. Consider these five reasons why the Hispanic market is so attractive:
--It's exploding. American Hispanics--defined as anyone of Spanish culture or origin, including immigrants from Latin America and much of the Caribbean--number 30 million, roughly equal to the population of Canada. And the group is only getting bigger: By the year 2010, it's expected that Hispanics will make up nearly 14% of the U.S. population, up from 11% today, overtaking African Americans as the country's largest minority. And by the year 2050, American Hispanics are projected to constitute fully a quarter of the U.S. population.
--It's young. On average, American Hispanics are just 27 years old; the average age for all Americans is 35. That's important for two reasons. First, younger adults spend a greater share of their income than do those in their forties and fifties, who are more prone to save and invest. In addition, many Hispanic women are just now entering their prime childbearing years, which ensures that the ethnic group's population will keep growing well into the next century. Leo Estrada, a demographer at UCLA's School of Public Policy, observes that "the American Hispanic population looks a lot like the baby-boomer population of the 1960s"--a generation whose every shift in taste and life stage has made fortunes for clever investors who got ahead of the wave.
--It has more and more money to spend. The recent rapid rise in Hispanic incomes, combined with high rates of birth and immigration, produce a knockout purchasing punch. The University of Georgia's Selig Center for Economic Growth recently released a study showing that American Hispanics' buying power--that is, their after-tax income as a group--has grown 65% since 1990, from $211 billion to $348 billion. (For a look at some surprising places where Hispanic buying power is growing fastest, see the map at left.) And the growth in Hispanic spending is expected to accelerate. The Trends Research Institute in Rhinebeck, N.Y. predicts that the buying power of American Hispanics will jump 93% over the next five years, compared with only 13% for Americans overall.
--It can be easily reached with a focused sales pitch. The Cuban-American physician in Miami who fled Castro's revolution might seem to have little in common with the farm laborer in San Diego who escaped from poverty in Mexico. And while many Mexican Americans love Tejano music, popularized in the U.S. by the slain singer Selena, immigrants from the Dominican Republic generally prefer to swing their hips to merengue or salsa rhythms. But since almost all Hispanics speak Spanish, they can be efficiently reached by targeted advertising and other marketing--unlike, say, Asian Americans. Surveys have found that 89% of Hispanic adults speak Spanish at home, while 75% tune in to Spanish-language broadcasts on TV and radio. And even if American-born Hispanics eventually drop their parents' idiom, the continuing influx of Hispanic immigrants into the U.S. will buoy demand for Spanish-language services.
In addition, although Hispanics are spreading out across the country, most of their population remains relatively concentrated: California, Florida, Illinois, New York and Texas account for 72% of Hispanic buying power. Isabel Valdes, president of Hispanic Market Connections in Los Altos, Calif., says "that gives corporate America an audience of Hispanics who can be targeted very easily" through Spanish-language broadcasts or publications.
--It is influencing mainstream American tastes. With salsa outselling ketchup in the U.S. in each of the past seven years, it's clear that many businesses that sell Latin-tinged products and services have a good chance of also winning mainstream customers. "Hispanics are driving many of the trends in American culture," says Christy Haubegger, publisher of Latina magazine. "We wore the frosted lipstick before anyone else, the green nail polish, the baggy clothes. So, really, who's influencing whom?"
To cash in on this trend, Erik Gustafson, manager of Stein Roe's Young Investor Fund, has bought shares in four companies that cater to Hispanic tastes. "Corporate America has finally gotten around to looking at this group," he says, "and it's pretty clear that it represents a phenomenal trend." Revlon, for example, is using Mexican actress Salma Hayek in national advertising campaigns, while Simon & Schuster recently created a division dedicated to Spanish-language books. America Online has a Hispanic Online site, and Visa has a co-brand card with Hispanic magazine.
The biggest U.S. companies have yet to earn a significant slice of their revenues from the Hispanic market. But below you'll find five smaller companies that have done just that. We found them by first surveying business consultants and Hispanic marketers, who steered us toward three industries: financial services, food and beverages, and media. From there, we consulted a dozen money managers and stock analysts for companies where Hispanic customers in the U.S. account for at least 20% of revenues. We also wanted companies that offer annual earnings growth of at least 10% in 1998 and whose shares are attractively priced. The stocks are ranked by their potential returns over the next 12 months. And all show bright prospects for the longer term.
Heftel Broadcasting (ticker symbol: HBCCA; recently traded on Nasdaq at $75; no yield). If you're scanning the radio dial looking for salsa tunes in Chicago or mariachi music in Las Vegas, chances are you'll stop on a station owned by this $72 million Dallas company. After 23 years in business, Heftel is the largest Spanish-language radio broadcaster in the country, and it just keeps growing. In 1996, it merged with Tichenor Media Systems, which owned 20 stations that broadcast in Spanish. Heftel thus increased the Spanish stations it owns or programs to 37. These include KLVE-FM, the station with the largest audience in English or Spanish in all of Los Angeles, as well as the No. 1 Spanish station in nine other top Hispanic markets from Miami to New York. "Their strategy is to buy underperforming radio stations and convert them to a Hispanic music format," says Merrill Lynch analyst Keith Fawcett.
That approach has produced sweet-sounding profits. Through the first half of 1997, the company's net broadcasting revenue was $61 million--more than double the amount recorded during the first six months of 1996. Heftel's strong position in each of the top 11 Hispanic markets is attractive to advertisers, says Lehman Bros. analyst Tim Wallace, who expects the company to increase its ad revenue by more than 15% over the next year. That should boost after-tax cash flow per share (which analysts consider a better measure of profitability for radio companies than earnings growth) by 25% in 1998, raising the share price to $100 for a total return of 33%.
Smart & Final (SMF; NYSE, $23.25; 0.9%). Where do you go if you need a six-pound can of tomatoes, a case of 1,000 envelopes or a gallon jug of mayonnaise? To a warehouse grocery store like $1.3 billion Smart & Final. The Los Angeles company is the country's largest operator of nonmembership warehouse grocery stores, which sell items in bulk and at discount in Florida and the West. That makes Smart & Final appealing to small commercial customers such as restaurant owners. Lately, the 126-year-old company has made a particular effort to attract Hispanic customers with its Montecito line of spices, and foodstuffs such as Ful-Flav-R diced green chiles. "Any restaurant needs napkins, but if it's a restaurant that also needs, say, a good selection of salsa, then it makes more sense to make one stop at Smart & Final than to go to two or three different stores," says Charles Cerankosky, an analyst with Tucker Anthony, a regional brokerage based in Boston. Furthermore, all of the company's U.S. stores are located in four states with large and fast-growing Hispanic populations: Arizona, California, Florida and Nevada.
The store's bulk items are also proving to be a big hit with Hispanic families, which tend to have lots of children. The average U.S. Hispanic household includes 3.5 people, compared with 2.6 for the typical non-Hispanic home. While products catering to Hispanics account for just 10% of the 11,000 or so offerings in the typical Smart & Final store, they generate more than 30% of the company's profits. For all these reasons, Salomon Bros. analyst Jonathan Ziegler is expecting earnings growth of 15% in 1998, pushing the share price up to $28 for a total return of 21%.
Popular (BPOP; Nasdaq, $50; 1.8%). The largest bank holding company in Puerto Rico, with $19 billion in assets, Popular has aggressively opened teller windows in Hispanic communities across the U.S. over the past decade. It builds new branches and also acquires them from other banks. Popular's U.S. assets now make up 25% of its total, up from just 5% in 1987. "A lot of Hispanics seem to feel more comfortable going to a bank that identifies with their culture, and Popular is really the only bank addressing that," says Joe Gladue, an analyst at the Chapman Co., an investment house in Baltimore. In April, Banco Popular launched its first national advertising campaign in the U.S., with leading Hispanic television personality Don Francisco as its spokesman.
Meanwhile, Popular continues to generate asset and loan growth by expanding its geographic reach. In October, it announced an agreement to buy Citizens National Bank, which serves several Hispanic communities in Houston. One of the area's leading lenders to low- and moderate-income home buyers, Citizens has $51 million in assets. James Schutz, an analyst at the investment firm ABN AMRO Chicago Corp., expects Popular to enjoy earnings growth of 10% in 1998, boosting the share price to $58 for a total return of 18%.
MoneyGram Payment Systems (MNE; NYSE, $15.75; no yield). While this $150 million Lakewood, Colo. company can instantly wire money among customers in more than 100 countries, fully 40% of its 6 million annual transactions involve transfers from the U.S. to Mexico. Analysts say this portion of MoneyGram's business is likely to grow--and hike the company's earnings--for three reasons. First, MoneyGram's chief agent in Mexico, Banamex, has added 91 branches this year--increasing its total network to 1,051 locations--and has started keeping some branches open on weekends. "This will allow them to reach more customers," says James Marks, vice president of equity research at Credit Suisse First Boston. Second, the company is expanding into other countries in Latin America and the Caribbean.
Finally, in August, another wire-transfer provider, $6 billion First Data, completed its takeover of Orlandi Valuta, which had been the industry's low-price leader in the U.S.-to-Mexico market. "Before, there was pressure on MoneyGram to keep prices low," says Marks. Thanks to the takeover, that pressure is off, which should push up fees and revenues. As a result, Keith Mullins, managing director of research at Smith Barney, believes MoneyGram will pump up earnings by 14% in 1998, lifting the share price to $18 for a total return of 14%.
Univision (UVN; NYSE, $62.25; no yield). Talk about having a captive audience: This $500 million Los Angeles television company is the leading Spanish-language broadcaster in the U.S., reaching 92% of Hispanic households and winning an 84% share of the prime-time audience among Spanish-language viewers. While CBS and ABC have each lost more than 2 million viewers over the past five years, Univision has gained 500,000. In fact, 1.5 million adults watch Univision during prime time--more than watch the Lifetime and USA cable channels combined. Moreover, as the Hispanic population grows in size and affluence in coming years, "so will Univision's audience, increasing the amount of money Univision can charge for advertising," says Ron Baron, manager of the Baron funds, who has held the stock since May. Morgan Stanley Dean Witter analyst Frank Bodenchak estimates that the typical network charges advertisers roughly $16 per 1,000 prime-time viewers, while Univision gets only half that amount.
Furthermore, Univision holds exclusive rights to broadcast all 64 soccer games of the 1998 World Cup in June. That event--another crossover triumph, benefiting from the U.S. boom in children's soccer--will bring in as much as $50 million in advertising revenue, Bodenchak says. As a result, he expects Univision to post after-tax cash flow growth of 10% in 1998. (Again, analysts consider this a more useful measure of a broadcaster's profitability than revenue growth.) Bodenchak projects the share price to rise to $70 for a total return of 12%. And Univision has the potential to grow even faster in later years--much like the Hispanic market it serves.