2 Stocks to Buy for the Booming Baby Business

by Hilary Kramer | July 29, 2013 10:14 am

Although my time and energy is focused on the stock market and companies worth investing in, even I couldn’t avoid the buzz around Kate Middleton and the future heir to the throne. It was baffling to see hundreds of headlines about what she wore, the baby clothes and necessities she was buying, and the play-by-play of the delivery of her healthy, beautiful baby boy.

You know me, always looking for the investing angle, and amid all the fascination with the future king of England, I did some digging and found that there are some interesting opportunities in the baby business.

Let’s take a look at the numbers: Birth rates in Australia, the UK, Canada, Ireland and other places have spiked over the last year or so, in some cases to the highest levels seen since the 1970s. There are plenty of theories as to why, but whatever the reason, the trend is real.

However, this isn’t the case for the United States, but there are indications the boom may follow here as well. The birth rate has dropped to an astounding 8% in the post-recession period and has now flattened out for the first time since 2007. I believe that this is because women are waiting until the economy gets back on track before starting a family. After all, children are expensive. As a mother of two, I know firsthand how much it can cost to raise a child.

But as the economy improves, the biological clock will start ticking even louder. Independent research firm Hedgeye estimates that as regional economies strengthen and the unemployment rate for women declines, we could see 700,000 to 1.4 million “backlog births” over the next three to five years.

Simply adding those babies back into the population curve translates into a 9% organic boom in demand for everything they and their families will need to consume.

In the next few years, I’m expecting the number of pregnancies, births and toddlers to be on the rise. And as you may know, children need a great deal of care, and the companies that can provide these necessities will do well. I’m talking from pre- and post-natal care to education and entertainment. Companies that can offer these services and investors who follow the census numbers should find long-term opportunities to spare. Here are two worth looking at right now:

When the number of births rises, I expect the obstetrics equipment and natal care providers to get a nice secular lift in the next year or so. Mednax (MD[1]) is one such company, and when patient volumes rise, high reimbursement rates means its fundamentals will strengthen very quickly.

Remember, the average American hospital birth costs twice as much ($30,000) as the royal delivery cost the British taxpayer. Multiply by over 1 million backlog births and MD has a huge opportunity here. I’ll be watching MD’s earnings report (scheduled to report around July 30) to see if it has started to materialize.

Another company to watch is Natus Medical (BABY[2]), a birth center equipment maker. While the chart is not as strong as what we’ve seen from MD, hospitals are evidently buying in order to expand and deepen their ability to care for tiny patients. First-quarter sales were up 44% over last year but consensus estimates are still a little high given management’s recent confession that growth in the second quarter “only” hit 32% to 34%. BABY could offer a good investment opportunity on weakness.

When the economy stabilizes, the baby business looks ready to boom. So make sure to keep an eye out for the companies that are poised to do well when the birth rate begins to climb back up.

Endnotes:
  1. MD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MD
  2. BABY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BABY

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