Big companies high on hit list over China exposure
Investors want to know where the money comes from
As third-quarter earnings season gets into full swing, one of investors’ biggest fears is getting Shanghaied by China.
Yum Brands gave investors a taste of why they should be concerned when its stock got trounced after it reported worse-than-expected results because of China, a vital market for the fastfood restaurant company.
There could be a lot more stocks hit on the Chinese connection. At least 25 other companies in the Standard & Poor’s 500, including semiconductor maker Skyworks Solutions, chipmaking equipment seller Applied Materials and gadget maker Apple get 10% or more of their revenue in their most recent fiscal year from China, a USA TODAY analysis of data from S&P Capital IQ shows.
China has been an engine of massive global economic growth for years. But being linked with China has become a negative in investors’ minds. The International Monetary Fund has cut its forecast for growth in China to just below 7%.
Seeing China cool is a problem for companies that bet big on it. Yum Brands, which operates KFC and Taco Bell, got more than half of its revenue in China last year. Personal care company Nu Skin warned it would miss third-quarter targets due to China, where it gets about a third of its revenue.
Investors increasingly are aware of the risk. Applied Materials’ stock is down 37% this year — making it the worst performer of the companies that reported notable sales in China. Fears about China have hurt shares of Apple, down more than 18% from its 2015 high. Apple got 17% of revenue in China its last fiscal year.
Don’t assume the China risk is
Companies don’t all report their geographic exposure the same way, making it difficult for investors to know where surprises might be until earnings season.
already baked into these stocks’ prices. Some stocks have remained resilient despite heavy exposure to the country. Shares of computer chipmaker Skyworks are up 9% this year even though it reported getting more than two-thirds of its revenue from China. Some companies with exposure to China won’t be fully understood until they report. Companies don’t all report their geographic exposure the same way — some grouping Chinese revenue in with “Asia” for in- stance, making it difficult for investors to know where surprises might be until earnings season. Some still hope it’s not as bad as many fear, says JJ Kinahan, chief market strategist at TD Ameritrade.
Alcoa’s CEO, in the company’s earnings report, “did bring up something important,” Kinahan says. “Although China is slowing, he still sees a 6.5% growth rate, which, quite honestly, the rest of the world would be happy to have.”