Kids Won't Stay At Home; They Will Buy a Home
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I found myself laughing at this Yahoo article that depicts those who are 16 to 34-years of age. The millennial generation (me being one of them) is a a group of kids who live in front of four inch screens, has to screen shot everything that goes on (Instagram,) and live at home with parents (this actually sucks.) Now, that doesn’t mean all millennials live at home with mom and dad, but a lot of them do.
Trends in teenagers
I think the most interesting things that the author, Rick Newman, brings out is the fact that the percentage of 16 to 24-year-olds with driver license declined below 70% for the first time since 1963. The point is, kids are not buying cars and not buying homes. Much of it may have to do with the fact that the unemployment rate is 16.1% for 16 to 24-year-olds. So these younger consumers are substantially more budget conscious, and have to adhere to better spending principles.
So the data seems a little crazy. But basically over the past three years we have seen three trends emerge: Durable goods new orders are on the rise as shown above. The overall population has grown by about 2.2% over the past 3 years, meaning that the increase in demand for durable goods is primarily driven by older laborers returning to the labor force and buying things like cars, homes, and etc. This is excellent news because in a trickle-down-economy, older people will eventually lift the younger people into the workforce. So for now, durable good demand is primarily driven by people who were unemployed and now re-employed. If anything, the younger generation will eventually be a part of the labor force and will increase consumption of durable goods.
Buy property, lending, and cars
I believe that the housing market is unquestionably on the mend, and it is likely to turn around. KB Homes (NYSE: KBH) should be a compelling investment opportunity that investors should pursue. The company grew Q1 2013 revenues to $405 million versus the $254 million in revenue in 2012. The growth in revenues was drive by a strengthening economy paired with an increase in the average selling price of homes. The company’s selling price of homes jumped from $219,000 to $271,000 between the first quarter of 2012 to the first quarter of 2013.
Analysts on a consensus basis anticipate the company to grow earnings by 136% in fiscal year 2013, implying substantial upside potential for those who are patient enough to buy into this homebuilder.
Bank of America (NYSE: BAC) will be lending more money if the average selling price and demand for homes is on the rise. Therefore, investors have to position themselves in this under-loved, under-valued, asset-rich bank. The company was able to grow earnings due to falling costs in its lending business. The bank reported loan loss allowances decreasing from 3.61% in 2012 to 2.49% in 2013. The CEO of Bank of America plans to increase earnings growth by cutting back costs an additional $8 billion through 2014.
The strong economic data, paired with increasing demand for durable goods along with declines in loan related losses, is driving the optimism analysts have towards this bank. The company is expected to grow earnings by 22.30% on average over the next 5 years.
Ford (NYSE: F) is my favorite car company in terms of financial performance. The company has been able to grow revenues from $30.5 billion in the first quarter of 2012 to $33.85 billion in the first quarter of 2013. The 10.98% growth rate in revenues made up for the decline in operating margin from 6.4% in 2012 to 5.2% in 2013.
Ford’s business was strongly supported by the economy. The company grew its market share position in the United States from 15.2% to 15.9% year-over-year in the first quarter of 2013. Analysts expect this trend to continue, with growth projected to be at 11.9% on average over the next 5 years.
Investing into automakers and the housing market would be a wise decision going forward. The economic indicators point to further strength. I anticipate the millennial generation to at some point follow a similar consumption patterns to older generations, and when they establish some stability in the labor force, household formations will be on the rise once again, which will boost economic growth.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Bank of America and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!