Two Industries With Good Long-Term Economics

In tough economic times, people tend to look for so-called “recession-proof” industries to stem the losses.  A recession-proof industry in one which generally performs well in a weak economy.  Those are not the types of companies I’m talking about here.  My focus today is on industries where long-term economic and demographic trends will drive above-average profitability over the long term.  Some of these industries have been hit hard in the recent financial crisis, but that has to do mostly with poor leadership and says little if anything about the underlying long-term fundamentals.  Today I’ll discuss two specific industries with amazing future growth and profit potential:  health care and for-profit education.  Tomorrow, I’ll cover two more such industries: money management and real estate

Health Care

Uncertainty surrounding Obama’s intentions for health care in America have battered heath care stocks of late.  Indeed, the Vanguard Health Care ETF (VHT) was down over 23% in 2008:  not quite as bad as the overall market, but not great either. But such poor results belie the massive profit-potential of this sector.  Take a look at industry stalwart Johnson and Johnson’s (JNJ) cash flow ratios and you’ll see JNJ generated almost $0.19 in free cash flow for ever $1 in sales in 2008.  That’s a Free Cash Flow (FCF) / Sales  ratio of almost 19% after capital expenditures!  Pfizer (PFE), another health care giant whose stock has struggled recently, did even better with a staggering 28.8% FCF / Sales ratio.

The bottom line is that people will always need quality health care.  What’s more, health care is one area where most people are cost-insensitive, meaning they are willing to pay absolutely whatever it takes to get the treatment they need for themselves or their loved ones.  Ask yourself this:  would you be willing to pay or borrow countless thousands of dollars if your life or the life of a loved one depended on it?  For most people, the answer is yes.  This underlying cost-insensitivity is what will drive health care profits for generations to come.  So long as people value their own lives and the lives of those close to them, health care will remain incredibly profitable.  Underlying demographic trends may augment or subtract from this from time to time, but they don’t change this basic fact.

For-Profit Education

For-profit education is actually one of those recession-proof sectors I mentioned above.  According to this piece by Yuval Rosenberg, the stocks of for-profit education companies are almost universally up over the past year.  The reason is simple:  the higher the unemployment rate rises, the more people decide to enroll in school to upgrade their skills.

This trend isn’t limited to economic downturns, however.  As the U.S. and global economy becomes more and more information-based, the consequences of being uneducated are likely to increase dramatically.  In a world of highly-focused niche specialization, a generalized high school diploma no longer affords you the job opportunities it once did.  For this reason, you can expect enrollment in higher education to grow rapidly over the coming decades as for-profit universities expand and  offer ever-increasing varieties of academic programs.  Apollo Group (APOL), DeVry (DV), and Strayer Education (STRA) are the 800 lbs gorillas of the group.