On November 15th, the Chinese government announced a relaxation of its controversial one-child policy. But I don't think Beijing will stop there.
The new 'family-planning policy' allows a couple to have two children if either member of the couple is an only child. Before, urban couples could have two children if both parents were only children; and rural couples could have two, if their first baby was a girl.
The reason cited for the easing is economics -- the policy hurts the economy, many say, amid worries about an aging population and a potential labor shortage.
For that reason, I'm going out on a limb today and predicting that within six months, China will officially end its one-child-per-family policy, and there will be no family planning requirements. And I predict such a move would help one industry in particular. But let me back up a little.
First off: How do you think an end to the one-child-per-family policy would impact stocks that cater to the already huge population of China?
Of course, the number of new bundles of joy this would create is heavily debated. Keep in mind that since China passed the one-child policy in 1979, the birth rate has declined 50% and prevented some 400 million births.
Estimates for the effect a change in policy would have in 2015 vary widely. I'll share the figures from Bank of America Merrill Lynch: China's population would increase by 9.5 million more babies each year over the first five years after the policy is lifted.
To put that in perspective, nearly 80 million 'peace, love and rock 'n roll' baby boomers were born in America over an 18-year period. If China begins rapid pace reproduction and it continues over the same amount of time, we're looking at 171 million more Chinese by 2033. That's 91 million more mouths to feed than came out of the baby boom.
And that brings me to my other prediction: Imagine how stocks of companies that feed the region's voracious appetite will react on that news.
Just to give you an idea of where I'm going, makers of infant formula -- poised to profit handsomely -- are particularly in love with the idea of lifting the one-child policy.
As expected, the quartet of homegrown producers -- Zhejiang Beingmate Technology, China Mengniu Dairy Co., China Modern Dairy Holdings Ltd. and Yashili International Holdings Ltd. -- saw their stocks surge by as much as 9.7% on Nov. 15, the day of the announcement.
While several multi-national companies may vie for a piece of this market, there's one company I see getting the 'dragon's' share of business.
Ever since a 2008 scandal in China when six infants died and hundreds of thousands were sickened from melamine-contaminated milk produced domestically, there has been a desperate outcry for safe baby formula.
To show you the scale of the demand, there were 82 million children in China under the age of five. Only 28% of babies under six months old were breastfed. The 2008 scandal left millions of parents scared, distrustful and with a $12.5 billion annual appetite for baby formula.
Through the years, companies have stumbled trying to get a foothold on the domestic market, as families showed their willingness to pay top dollar for foreign-made formula that they presumed would be safer.
While China certainly can control who can sell products to its citizens, a few companies have taken up the slack. Nestle, Abbott Laboratories (NYSE: ABT), Heinz and Mead Johnson Nutrition (NYSE: MJN) are competing to suck up the 20% growth in the infant formula market Oppenheimer expects in 2017, if the policy is lifted.
The company that stands out by a long shot is Mead, ranked first in China's milk-formula market with a 14% share last year. China's Hangzhou Beingmate Group was No. 2 with 10%.
Mead is also the only company solely focused on selling infant and child nutrition products. About 30% of its revenue is generated in China. The same day news that a policy change broke, Oppenheimer upgraded Mead's stock from perform to outperform with a price target of $100 for fiscal year 2014-2015, up from its current price around $85.
The positive outlook for Mead isn't based solely on China's policy change. Third-quarter 2013 earnings rose 15% and the company subsequently raised its adjusted earnings outlook for the full year from $3.22 to $3.37.
Risks to consider: In July, Mead was investigated for possible 'price-fixing and anticompetitive activity.' The company said that as a result, it will cut prices in China and pay a $33 million penalty as part of the resolution. While I don't think this will affect business, the Chinese government must always be considered a wildcard.
Action To Take--> Though Mead is not a cheap stock, with a forward-looking PE of 17.7, its growth potential is very enticing -- especially given potential developments with the one-child policy. It also delivers a 1.7% dividend yield, making this a stock to buy today.
