March 2005 – Institutional Investor

Newspaper / Magazine:Institutional Investor
Article Title:Hispanic Button
Date:March 14, 2005
Author:Laurie Kaplan Singh

Institutional_InvestorR&G Financial Corp.’s stock is soaring. Despite a recent 7 percent pullback sparked by rising interest rates and profit-taking, the Puerto Rican bank has gained an average 40.1 percent annually over the past three years, versus a 16 percent gain for the average regional bank stock.

In part, the surge reflects favorable dynamics in Puerto Rico’s mortgage market and R&G’s success at snaring market share. But to a considerable degree, the bank’s gains have been fueled by its expansion on the U.S. mainland — specifically, into local Hispanic markets. R&G closed a deal in late February to acquire 18 former SouthTrust Bank branches in Florida and Georgia from Wachovia Corp., doubling its presence in Florida and boosting its profile among Hispanics, the fastest-growing segment of the U.S. population.

“This is a critically important demographic shift,” notes Carlos Signoret, a partner at Hispania Capital Partners, a Chicago-based private equity firm with $125 million in assets. “It’s second only to the aging of the baby boomers.”

It is also a phenomenon that investors would be be wise to investigate. Investment bank Samuel A. Ramirez & Co’s. index of leading U.S. Hispanic companies out-gained the Russell 2000 index by 15 percentage points a year in a four-and-a-half-year back-test ending last month.

Demographics may not be destiny, but they are opportunity. About 36 million Hispanics live in the U.S., some 13 percent of the population. The U.S. Census Bureau projects that this figure will swell to 20 percent by 2030, driven by immigration (at a rate of about 700,000 per year) and high birthrates: 2.9 for Hispanic women versus 1.8 for white non-Hispanic women. Hispanics boast rising income levels, and the group is also young, with a median age of 25.9, versus 35.5 for the broader population.

“Hispanic purchasing power has been rising steadily in recent years,” says Jay Garcia, who heads the equity department at New York’s Samuel A. Ramirez, the oldest and largest Hispanic-owned U.S. investment bank. Waltham, Massachusetts- based Global Insight, an economic research and consulting firm, estimates that Hispanic spending power — $530 billion in 2002 — will surpass $1 trillion by 2010. Conveniently for marketers, the Hispanic population is also highly concentrated, with more than 62 percent living in California, Florida, New York or Texas.

Mainstream corporate America has certainly responded to the trend and is spending more dollars to advertise to Hispanics than ever before. According to Alissa Goldwasser, a media-stock analyst at William Blair & Co. in Chicago, Spanish-language advertising in the U.S. increased by 12 percent in 2003, to $3.46 billion, and is estimated to have grown 14 percent in 2004, to $3.94 billion. Among the U.S. companies that have substantially increased Spanish-language ads in recent years are Procter & Gamble; Sears, Roebuck & Co.; and Time Warner.

“Still, there is a huge gap between the spending power of the Hispanic population and the amount of advertising targeted at it,” observes Sean McLeod, manager of the $375 million First American Small-Cap Growth Opportunities Fund. He notes that Hispanics represent about 7 percent of U.S. consumer purchasing power but only 2 percent of corporate America’s advertising budget.

“Closing this gap will require a $1 billion increase in Spanish-language advertising expenditures,” McLeod contends. And that additional spending, he says, will boost profits at Spanish-language media companies, such as Spanish Broadcasting System — one of First American’s top ten holdings — Univision Communications and Entravision Communications Corp.

“Spanish Broadcasting is the only pure Spanish-language radio play that’s publicly traded,” McLeod says, noting that rival Hispanic Broadcasting Corp. was acquired in 2003 by Univision. “It enjoys high ratings and has the best top-line growth in its industry.” Spanish Broadcasting is also in the process of selling $200 million in non-core assets — a move that, according to McLeod, will “strengthen its balance sheet, allow the company to refinance debt and dramatically lower interest costs.” McLeod began adding to the fund’s small position in Spanish Broadcasting in July when the stock dipped to about $8.50. It has since climbed back to $10, and McLeod thinks it could hit $15 within the next 18 months.

“Hispanic media is going to grow at at least twice the pace of the general market media,” maintains William Blair’s Goldwasser. Her favorite company in the sector is Univision, the dominant player in Spanish-language television. Univision’s stock climbed 62 percent in 2003 but lost 26 percent last year as investors worried about mounting competition and its integration of Hispanic Broadcasting. Softer-than-expected fourth-quarter TV advertising revenues have kept the stock under pressure. Between year-end and February 11, shares fell 7.9 percent, to $26.71.

Nevertheless, Goldwasser remains optimistic about Univision’s long-term growth potential; she rates the stock outperform. “Concerns about Univision tend be amplified [in the market],” she says. “But we feel Univision’s stations are all very well positioned.”

For many, the greatest opportunities are in private companies. A number of large pension plans, including the California State Teachers’ Retirement System and the New York State Common Retirement Fund are pouring money into Hispanic private equity funds at an impressive clip.

“We believe that the demographic trends occurring in the Hispanic population represent an important secular shift, and we are positioning ourselves to profit from it,” says CalSTRS chief investment officer Christopher Ailman.

Over the past three years, the $125 billion pension fund has invested nearly $440 million in private equity and real estate projects with significant potential to benefit from the growth and rising income levels of U.S. Hispanics. Similarly, the $180 billion The California Public Employees’ Retirement System has committed capital to three of the leading Latino-owned private equity funds: $50 million to Bastion Capital Fund, $50 million to Palladium Equity Partners III and $25 million to Nogales Investors. In December 1997 it invested $20 million in San Diego-based Delimex Holdings, a Latino-owned-and-managed food company. CalPERS exited the deal, after doubling its investment, in August 2001, when Delimex was purchased by H.J. Heinz Co.

Responding to investor interest in Hispanic companies, Ramirez, which manages $2 billion, introduced the Ramirez Hispanic index in November 2003. The RCHI is composed of the ten largest (by market capitalization) and most-liquid companies traded on U.S. exchanges that are 51 percent or more Hispanic-owned or derive 51 percent or more of their revenues from Hispanic consumers. Only 20 companies fitting these criteria are listed on U.S. exchanges. Ramirez also developed the Ramirez & Co. Hispanic Index Equally-Weighted Portfolio, Series I, which holds the stocks contained in the RCHI. Assets currently total $15 million.

The RCHI gained 20.1 percent annually on average in the four and half years ended this February, versus an average annual gain of 5.3 percent for the Russell 2000 index. Says Ramirez’s Garcia, “Revenues of Hispanic companies are growing at an average rate of 30 percent a year — four times faster than the rest of corporate America.”

Among RCHI’s best-performing stocks over the past five years have been Doral Financial Corp., Puerto Rico’s largest residential mortgage lender (up 617 percent); R&G Financial, the parent of R&G Premier Bank of Puerto Rico and R&G Mortgage (up 324 percent); and W Holding Co., a Puerto Rico-based commercial bank holding company (up 172 percent).

Many analysts and portfolio managers expect continued stock price gains from financial services companies that serve the Hispanic market. “Banks are always the first in the food chain to benefit from economic shifts,” points out Audrey Snell, a bank analyst at Brean Murray & Co. in New York.

Popular, the bank holding company for Banco Popular de Puerto Rico, has made a major mainland push in recent years, and the U.S. now accounts for 30 to 35 percent of the bank’s revenue, according to Joseph Gladue, a bank-stock analyst at Philadelphia-based Cohen Brothers & Co. Popular’s stock appreciated 28.6 percent in 2004, about double the rise of the typical midcap or large-cap bank stock.

Paul Lambert, co-manager of the $1.7 billion Wasatch Core Growth Fund, is a longtime holder of Fort Worth, Texas-based AmeriCredit Corp., a consumer finance company specializing in purchasing auto installment sales contracts from independent dealers. “The company will benefit from population and income growth among Hispanics seeking auto loans,” he explains.

Nonetheless, the stock started plunging in the second half of 2002, falling from $28 that June to a low of $1.55 in March 2003, when an increase in the cash reserve requirement on its securitizations left the company in need of a cash infusion. But after restructuring, AmeriCredit is in solid shape, Lambert believes — a judgment that most investors seem to share. The company’s stock, which the fund has held for six and a half years, was trading at $24.73 in mid-February.

 

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