China is an earnings bright spot

Slides
Photos

(China Daily/Agencies)
Updated: 2009-07-27 11:50

A Caterpillar track loader (left) and excavator are used to grade a parking lot in Buckhead, Georgia. Caterpillar Inc, the world's largest maker of construction equipment, posted second-quarter profits that exceeded analysts' highest estimates, aided partly by its brisk business in China. [Agencies]

Thank goodness for China.

So goes the thinking among top US executives this summer - or at least it should.

For China is proving one of the few bright spots during the US earnings season.

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, Caterpillar Inc, Coca-Cola, Alcoa Inc, Altera Corp and Cummins Inc, 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 (UTC), the world's largest maker of elevators and air conditioners, is among the companies expecting strong second-half results from China.

"China is recovering," UTC Chief Financial Officer Greg Hayes said after the company posted a lower second-quarter profit last 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.

Bigger stimulus

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.

Profit Investment Management has $1.5 billion of assets under management and owns shares of General Electric Co, United Technologies and Illinois Tool Works Inc, 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," he said.

That will be good news for companies doing business in China.

Strong returns

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 July 21 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," he said.

'Very bullish'

Even companies that aren't seeing strong growth in China see it as a temporary lull.

Yum Brands Inc, 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.

Yet, China's stimulus policies could also prove challenging for some US companies.

There is the risk of the economy overheating - always a threat when spending is so loose.

There also is 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 likely won't last as the government takes steps to grow its own aluminum industry.

"We don't expect imports to go on forever," CEO Klaus Kleinfeld conceded earlier this month.

Reuters

(For more biz stories, please visit Industries)