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Did you know that by the year 2020 – only 8 short years away – 30% of the total population of Australia will be age 55 or over?

Politicians and pundits in industrialised nations everywhere fret and fuss about the consequences of the upcoming retirement of history’s largest generation – the Baby Boomers.  Soldiers across the globe returned home from World War 2 and promptly began to make up for lost time.  They made babies.  Lots and lots of babies.  But when the Boomers grew up, the majority decided to make no more than two babies, turning historical demographic trends upside down.  For the first time in history, we are facing the prospect of more people in retirement than in the work force.

While the politicians and pundits panic, intelligent investors are looking for ways to profit from this explosive expansion of a demographic market segment.  The most obvious places to look for shares that stand to profit are healthcare, tourism, leisure, insurance, and financial planning.

In Australia we have a unique subset of Baby Boomers that could provide more focused investing opportunities – the Grey Nomads.  Even if you have never heard the term, you have undoubtedly seen some Grey Nomads.  As their moniker implies, they are those grey-haired occupants of the increasing number of caravans dotting the highways and remote roads all across Australia.

They are not a completely monolithic group but the common characteristics are long trips to sometimes adventurous locations in vehicles that provide lodging as well as a means of transportation.

The Caravans in which these intrepid seniors roam the landscape range from expensive and fully equipped motor homes, to more modest recreational vehicles, to pop-up campers, to vans and tent gear.

Here is why the Grey Nomad phenomenon represents a solid investment opportunity.  For the past decade, the caravan, motor home, and camping industry has been Australia’s fastest growing tourism sector.  It appeals to wealthier Australians looking for the opportunity to experience Australia in its rugged natural state.  It appeals to those of more modest means as a more affordable way to tour the country for extended periods.

Here is a graph from the website of the Recreational Vehicle Manufactures Association of Australia (RVMAA) showing the growth in the production of recreational vehicles since 1992:

Between 2000 and the close of the decade in 2010, production more than doubled.  As you may have read, the first wave of Baby Boomers will begin retiring in 2011.  No matter how many immediately emerge as Grey Nomads; their numbers will grow, fueling an already booming industry segment.

While the supply of caravans has risen to meet the demand, the number of caravan parks has actually dwindled, creating an opportunity for the park providers who will surely materialise to meet the growing demand.

Rather than spend countless hours scouring through the healthcare sector looking for the beneficiaries of future Baby Boomer retirees, let’s look at the shares of two companies already serving the needs of Australia’s Grey Nomads.

CompanyCodeMarket Cap52 Week High/LowCurrent Share Price
Fleetwood CorporationFWD723M$14.25/$9.53$12.28
Super Retail GroupSUL1,137M$6.65/$4.9$5.84

In brief, FWD makes caravans along with caravan parts and accessories, and pre-fabricated modular living accommodations.  They also own and operate Caravan Parks.

Super Retail has historically been an automotive parts and tools supplier as well as a supplier of camping and outdoor leisure equipment.  In 2011 they acquired a full service sporting equipment retailer, Rebel, to expand their product offerings.

So here we have one company that makes the vehicles Grey Nomads need and accommodations for them; and another that provides them with parts for the vehicles and equipment needed for them to enjoy Australia’s abundant and magnificent outdoors.  Let’s look at some market valuation and financial performance numbers for both companies:

 P/EP/EGROEDiv Yield
FWD13.773.2324.80%6%
SUL13.030.5718.30%4.90%

With P/E ratios under 15, high dividend yields, and ROE’s over 15%, both these companies would meet the standards of many value investors and Super Retail’s impressive P/EG ratio of .57 appeals to Growth at a Reasonable Price (GARP) investors as well.  Both showed substantial improvements in revenue and net profit between 2010 and 2011.  

Considering their business sectors, one would expect they had a difficult time during the GFC.  Here is a five year price movement chart for the two companies:

Both suffered, both recovered are now trading higher than their pre-GFC levels.  

We suspect Fleetwood will be the superior of the two despite their similar financial and share price performance.  Fleetwood began as a provider of recreational vehicles back in 1964.  They are well positioned to profit from a boom in that business segment as more and more retirees take to the road.  They could benefit even more from their 1987 expansion into the Caravan Park business.  If the Grey Nomads increase in dramatic numbers, they will need places to stay and FWD will be there to not only provide the vehicles in which they travel, but places to park them as well.

The third reason for optimism about Fleetwood is their modular living accommodation business segment.  They provide these units to the Australian resources sector.  Although classified as an Automobiles and Components company, they are also an energy and resources service provider.  In short, they are already a key player in three of Australia’s fastest growing business sectors – Recreation, Retirement, and Resources.

Since August of 2011, FWD has been upgraded by UBS, Macquaire, Credit Suisse, and RBS Australia.  A major reason for these upgrades was the awarding of a contract from BHP Billiton to provide ancillary building floors.  The deal has the potential to increase Fleetwood’s annual earnings somewhere between 30 and 60 million dollars.

One of the company’s major income streams is the Searipple mining accommodation village in Karratha, Western Australia.  This village is near 100% occupied and well situated near key mining and energy projects.  The margins on the rental income are close to 40%.  Fleetwood received a contract from Woodside Petroleum to add an additional 1,520 accommodation units to the village.  In addition, rental contracts are long term, ensuring a continuing high margin revenue stream.

Their position in the resources sector is a major consideration in determining whether to invest in this company.  If Australia’s resources boom continues, FWD will continue to show strong growth.

Their dealer distribution network to serve the recreational vehicle market is another highly attractive feature of the company’s solid business model.  These are exclusive dealerships that sell only Fleetwood products not only in their own locations, but at trade shows across Australia.

Fleetwood has already benefited from the mining boom in Australia and will continue to do so.  They stand to benefit from an aging population as well.  Most investors are well aware that people are living longer.  What not so many know is that people are maintaining their health longer as well.  This does not mean they will not need more healthcare as they age.  It does mean they will be able to engage in outdoor leisure activities far longer than many suspect.  Across the world, living to the age of 100 is no longer a rare occurrence.  What’s more, there is growing evidence of more and more seniors living into their early nineties without suffering the kind of debilitating illnesses that would confine them to a nursing home.  

 

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