China provides earnings lifeline for U.S. companies
NEW YORK (Reuters) - Thank goodness for the Middle Kingdom.
So goes the thinking among top U.S. executives this summer -- or at least it should. For China is proving one of the few bright spots during the U.S. earnings season as the country's super-sized stimulus package is starting to support demand for everything from computers to construction equipment.
While the results season is far from over, the list of companies that have cited China as a positive is already notable: Intel Corp (INTC.O), Caterpillar Inc (CAT.N), Coca-Cola (KO.N), Alcoa Inc (AA.N), Altera Corp (ALTR.O) and Cummins Inc (CMI.N), among others.
"I'm certainly glad I'm in China," John Watkins, chief executive of Cummins (China) Investment Co, said recently.
Not that business is all rosy in China. Indeed, Cummins, the diesel engine manufacturer, expects to report a drop in sales in China this year -- but the decline is likely to be far less that it will suffer globally.
United Technologies Corp.(UTX.N), the world's largest maker of elevators and air conditioners, is among the companies expecting strong second-half results from China.
"China is recovering," Chief Financial Officer Greg Hayes said after the company posted a lower second-quarter profit on Tuesday.
"As foreign direct investment picks up and the compounding effect of the stimulus picks up, we've got a lot of confidence that we're going to see a strong back half for Otis (elevators) as well as Carrier (air conditioners) in China and even a strong 2010," Hayes said.
Why such optimism? China's fiscal stimulus package seems to be working, executives and analysts say. The country appears to be the first major economy to pull decisively out of the global downturn, having posted annual growth of 7.9 percent in the second quarter.
Simply put, Beijing's stimulus of $500 billion, in a $3 trillion economy, is much bigger than Washington's $800 billion in a $14 trillion economy, said Guaylon Arnic, materials analyst for Profit Investment Management, which has $1.5 billion of assets under management and owns shares of General Electric Co (GE.N), United Technologies, and Illinois Tool Works Inc.(ITW.N), among others.
"What you're seeing out of China is a direct result of a much more aggressive stimulus program," Arnic said.
"The velocity of their stimulus plan is showing a lot stronger results here in the near term. It's reasonable to expect (China) to come out of this downturn sooner than other parts of the world."
That will be good news for companies doing business in China. Intel, whose quarterly results and outlook far surpassed expectations, is among those already benefiting from China's recovering economy, which has sparked sales of personal computers that use its chips.
Even soft drinks can be included in the products that are selling well in China -- at least in comparison with other countries. Coke's second-quarter volume grew 14 percent in the country, with Sprite and Minute Maid particularly strong sellers.
Coke CEO Muhtar Kent said during a conference call on Tuesday that one result of Beijing's stimulus package -- at least at this point -- is a shift in demand within China.
In the past, Kent said, the coastal regions accounted for the strongest demand for Coke's products. "I think some of that dynamism of growth has shifted to the inland as more consumers have moved in fairly large numbers. Millions and millions, tens of millions of consumers have shifted and moved back into the country, into their hometowns."
Kent added, "Now with the very effective stimulus plan of China, those consumers have more money to spend and I think we're seeing a shift from the coast into more central and western cities."
Even companies that aren't seeing strong growth in China see it as a temporary lull.
Yum Brands Inc. (YUM.N), owner of KFC, Pizza Hut and Taco Bell, has seen a slowdown in sales at restaurants in China as consumers have cut back on eating out and put more money into savings. But the company is hardly backing out of China.
"We still feel very bullish about long-term trends in China," Yum Chief Financial Officer Rick Carucci told investors during an earnings conference call.
More help may be on the way from China, with some now saying conditions are ripe for Chinese stock and property prices to extend their run, which would fuel even more spending by both corporations and consumers.
Yet China's stimulus policies could also prove challenging for some U.S. companies. Not only is there the risk of the economy overheating -- always a threat when spending is so loose -- but there is also the chance that government measures will help Chinese companies and choke off imports of some foreign products.
Take Alcoa, for instance. That company is set to enjoy the benefits of China's aluminum imports -- for the moment. But that won't likely last as the government takes measures to stimulate its own aluminum industry.
"We don't expect imports to go on forever," CEO Klaus Kleinfeld conceded earlier this month.