WEEKLY ISSUE: Revisiting Aging of the Population theme and introducing a new position
Key points inside this issue
- We are issuing a Buy on and adding shares of AMN Healthcare (AMN) to the Tematica Investing Select List with a price target of $75.
Today we complete the recasting of our 10 investment themes that we’ve undertaken over the last several weeks. That process has led to several new investment positions and today we have a new one as well as we revisit our Aging of the Population investing theme.
Stepping back a few paces, I recognize that we’ve introduced several new positions in as many weeks. Hang tight for a day or two, and I’ll share the logic behind what we’ve been up to, and I suspect you’re going to nod your head as you read it. For now, let’s get to Aging of the Population and that new pick.
There Is Just No Fighting Father Time
As we look around us, it’s rather obvious that people are living longer, which in many respects is a good thing, but those extra years have a significant impact on society. As we age our needs and abilities change, and with that so do the services and products that we consume.
According to a National Center for Health Statistics report released in 2016, the average life expectancy in the U.S. stands at 78.8 years on average, with women outlasting men by a few years 81.2 years of age vs. 76.6 years. By 2030, the Administration on Aging (AOA) estimates there will be about 72.1 million people aged 65 or older, more than twice their number in 2000. In 2010, the baby boom generation was between 46 and 64 years old, and that generation is now beginning to enter their 70s.
Over the next 13 years, all of the baby boomers will have moved into the senior generation, resulting in a major structural shift in demographics. From 2010 to 2030, the percent of the population over 65 will increase from 13 percent to 19 percent while the percent of the U.S. population aged 20-64, the primary working years, will decrease from 60 percent to 55 percent. The broadening of the upper age pyramid is poised to significantly impact demands on healthcare, housing and transportation and question the ongoing viability of social service programs like Medicare, Medicaid and Social Security. Ah, yes more fun times to be had in Washington over the next decade.
We in the United States are hardly alone in this demographic shift
Canada, Japan, and most of Europe have an even higher percentage of their populations in the older age brackets. According to population projections from the United Nations published in its 2013 “World Population Ageing” report, the global population aged 65 and older will triple over the next 40 years, from 500 million in 2010 to 1.5 billion by 2050, thus doubling the share of this demographic across the world from 8 percent to 16 percent. There is a shift toward older age brackets in almost every country as people live longer and have fewer children. Digging into the specifics of that UN report one sees that:
- Roughly 26 percent of Japan’s population is aged 65 or older, and 32.2 percent are expected to be senior citizens there by 2030
- Germany has 17 million people who are aged 65 and older, and that number is expected to swell to 21 million by 2030.
- By 2030, there are projected to be nearly 16 million retirees in Italy with 25.5 percent of Italian citizens anticipated to be 65 or older.
- There are 8.4 million Spaniards age 65 or older, and they comprise 17.6 percent of Spain’s population. Those numbers are estimated to grow to 11.5 million in 2030 when this age group is expected to make up 22 percent of the population.
How does this stack up against what it used to be?
Per historical data from the UN, life expectancy was 65 years in 1950 in the more developed regions, as compared with 42 years in the less developed regions. (Note that the latter number was heavily skewed by higher child-mortality rates.) Between 2010 and 2015, these figures are estimated to be 78 years in the more developed regions and 68 years in the less developed regions. The gap is expected to narrow even further: By 2045 to 2050, life expectancy is projected to reach 83 years in the more developed regions, and 75 years in the less developed regions.
As the life expectancy gap narrowed between developed and less developed regions, the average age expectancy of both groups increased. The number of people 65 and older was 841 million in 2013, four times higher than the 202 million seen in 1950. This population is expected to nearly triple by 2050 when its number is expected to surpass the two billion mark. The proportion of the world’s 65-or-older population is expected to increase to 21 percent in 2050 from just 12 percent in 2013 and 8 percent in 1950.
This living longer is the basis for our Aging of the Population investment theme. It will lead to new products and services that cater to the needs of this increasing “older population ”demographic, but it also means greater demands on savings and investments. Unfortunately, according to a report by the Economic Policy Institute (EPI), the average household aged 56-61 has amassed a retirement nest egg of just $163,000 which equates to an average monthly income of just $681 across a 20-year retirement according to EPI. Worse yet, an estimated 41% of households aged 55-64 have no retirement savings at all and over 20% of married Social Security recipients and 43% of single recipients 65 and over rely on their monthly benefit checks to provide at least 90% of their income.
The big issue facing the nation is the assumption of a 20-year retirement time period when data from the Social Security Administration shows one out of every four 65-year-olds today will live past the age of 90, while one out of 10 will live past 95. It’s no wonder 60% of baby boomers claim they’re more afraid of outliving their savings than actually dying. This is a massive problem across much of the world as rising life expectancies place much greater strains on government managed retirement programs while the percent of the population paying into those programs declines. Payout levels are growing while relative contribution levels are declining.
Who will ride the Aging of the Population tailwind?
The bottom line with this massive worldwide demographic shift towards a more senior population is a reallocation of spending and consumption habits. Money that was once dedicated to supporting a young and growing family will increasingly shift toward spending that serves an aging population. Pronounced spending shifts such as these can have a dramatic impact and in this case, the snowballing of the “older population” likely means an even greater compounding effect will be had.
How big will this overall aging lifestyle-spending shift be?
According to research firm A.T. Kearny, worldwide spending (remember the aging of the population is global) by mature consumers is forecasted to reach $15 trillion annually by 2020. That’s a large opportunity for industries that are meeting the particular needs of consumers age 65 and older and with the aging population only expected to grow further between 2020 and 2030, spending by this cohort will grow substantially in the coming decade-plus. It also likely means that more companies will tailor products and services to meet this opportunity.
There are a number of industries that will likely be beneficiaries. Some are obvious — healthcare, pharmaceuticals and medical technology are what come to mind for most people and certainly receive significant weighting in the Aging of the Population index. Others are less obvious but just as important and likely to feel the same thematic impact. We’re talking about:
- A shift in demand for different types of housing as seniors give up on the homestead and move into easier to maintain condos and townhouses.
- An even greater focus on online retailers that will deliver purchases directly to the home, rather than having to go out and carry purchases from the store to the car and then into the home. Also driving this shift will be younger children making purchases for their aging parents and having them shipped directly to their home.
- Financial Services stands right in the middle of the storm as the wealthiest generation in history starts to draw down on assets to fund retirement rather than accumulate more and more each year.
- Fountain of Youth goods and services will be in even higher demand as Baby Boomers have shown they are not likely to let go of their youth easily.
- And finally, technology and services that will help maintain independence— we’re talking about robots, digital assistants, monitoring equipment and even things such as the autonomous car.
Enter AMN Healthcare
One of the key aspects of our Aging of the Population investing theme centers on the aging of the baby-boomer generation and the corresponding needs and pain points. Looking at the domestic population, no matter the data or the source, it all points to the same thing — more people over age 65 than ever before.
Now for the real whammy: According to the National Council on Aging, 80% of older adults have at least one chronic condition, and 68% have at least two. Combined with the underlying demographic shift, this will place far greater demands on the domestic health care system in the coming years.
While many tend to focus on any one of the various aspects of the health care systems, the combination of the aging population and chronic conditions is a demand driver for nurses. But here’s the problem: The U.S. has been dealing with nursing constraints over the last few decades. Viewed against the aging population and an aging nursing workforce with limited capacity at nursing schools, that constraint is looking more and more like an outright shortage.
- According to the Bureau of Labor Statistics’ Employment Projections 2014-2024, Registered Nursing (RN) is listed among the top occupations in terms of job growth through 2024. The RN workforce is expected to grow from 2.7 million in 2014 to 3.2 million in 2024, an increase of 439,300 or 16%. The Bureau also projects the need for 649,100 replacement nurses in the workforce bringing the total number of job openings for nurses due to growth and replacements to 1.09 million by 2024.
- By 2025, the shortfall is expected to be “more than twice as large as any nurse shortage experienced since the introduction of Medicare and Medicaid in the mid- 1960s,” according to Vanderbilt University nursing researchers.
- Roughly a million registered nurses (RNs) are older than 50, according to the American Nurses Association. What this means is roughly one-third of the current nursing workforce will reach retirement age in the next 10 to 15 years. Some estimates place the total number of nurses expected to exit the position as high as 700,000 over the next eight years.
Where does this leave us?
The nursing shortage that we’ve identified as part of our Aging of the Population theme looks to benefit from both a significant increase in demand but also a scarce-resource tailwind as well. That combined tailwind has been extremely beneficial to the shares of AMN Healthcare Services (AMN), a healthcare workforce and staffing solutions company with an emphasis on the nursing industry. Tematica Investing subscribers should be familiar with the company given the AMN shares resided on the Tematica Investing Select List from August 2016 until May 2017, when we were stopped out of the position.
Staffing Industry Analysts (SIA) estimates that the segments of the target market in which AMN primarily operate have an aggregate 2018 estimated market size of $17 billion, of which travel nurse, per diem nurse, locum tenens and allied healthcare comprise $5.4 billion, $3.7 billion, $3.7 billion and $4.2 billion, respectively. Based on the consensus revenue forecast of $2.15 billion this year for AMN, the company has approximately 12.5% market share across those aggregate markets. And as the population continues ages, those figures will continue to rise, giving the opportunity for AMN to place not only nurses but assist in other physician leadership searches as part of its Managed Service Program offering. Generally speaking, AMN’s revenue and profit stream reflect the number of healthcare professionals it has placed on assignment multiplied by the average bill rate. More than likely as the shortage continues, the company’s average bill rate is poised to move higher making for nice incremental margin gains.
The question to be asked now is if there is sufficient upside in AMN shares to have them rejoin the Select List at current levels?
Looking at the discrepancy in the monthly JOLTS reports between the number of healthcare job openings vs. the number of filled healthcare jobs, we know the healthcare workers shortage pain point remains. Over the 12 months ending June 2018, per the monthly JOLTS report, the ratio of healthcare and social assistance job openings to hires has remained near 1.9x. The analysis of the nursing shortage over the last few pages also tells us that it’s not going to be solved in one year’s time let alone in the coming few years, which means the sting of that pain point of that shortage will be felt some time to come. This will likely translate into continued top and bottom line growth for AMN as its revenue model capitalizes on that pain point. Should we see an increase in the number of new nurses coming into the market, this will likely augment AMN’s revenue stream as it leverages its market position and places a percentage of those new entrants.
Over the 2012-2020E period, AMN is expected to grow its bottom line at roughly a 17% compound annual growth rate (CAGR). As the nursing shortage pain point has intensified over the last several years, AMN shares have peaked at more than 21x earnings and bottomed out at an average P/E multiple at 14x. Applying these historic multiples implies upside from current levels to $72, with downside risk to $48. With more Baby Boomers turning 70 years old every day, odds are those historic PE multiples, particularly to the downside, will move higher in the coming years as the severity of the nursing and aging pain point is more fully recognized. While we could stretch the P/E multiple to warrant a $75-$85 price target (and downside to just under the current share price), a better way to view it would be to place a discounted P/E placed on expected EPS of $4.00 in 2020, which gives us a $75 price target.
- We are issuing a Buy on and adding shares of AMN Healthcare (AMN) to the Tematica Investing Select List with a price target of $75.
Companies riding the Aging of the Population investing theme
- A V Homes (AVHI)
- Amedisys Inc. (AMED)
- ANI Pharmaceuticals (ANIP)
- Athene Holding (ATH)
- Brookdale Senior Living (BKD)
- Caretrust (CTRE)
- Charles Schwab (SCHW)
- Cross Country Healthcare (CCRN)
- CVS Health (CVS)
- Ensign Group (ENSG)
- Estee Lauder (EL)
- Express Scripts (ESRX)
- Lab Corp. (LH)
- Lindblad Expeditions (LIND)
- Omega Healthcare (OHI)
- Nu Skin (NUS)
- Physicians Services (DOC)
- Quest Diagnostics (DGX)
- Service Corp (SCI)
- Spok Holdings (SPOK)
- StoneMor Partners (STON) – basically the same and AMN
- Wright Medical Group (WMGI)
- Zimmer Biomet Holdings (ZBH)
- Zoetis (ZTS)
