Beware “blame China” earnings phenomenon

July 13, 2012

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Get ready for some corporate China-bashing this earnings season. Investors are already punishing companies like Burberry and Cummins for what they perceive to be disappointing growth from the Middle Kingdom. A slowdown in the world’s growth engine will see many more CEO fingers pointing east.
 
Trench-coat maker Burberry’s shares fell 7.4 percent on June 11 after it said annual Chinese same-store growth was somewhere near 15 percent in the past quarter, compared with twice that a year earlier. Never mind that this time last year Burberry had just bought out and glammed up its Chinese stores, making 2011 a tough act to follow. Investors saw a hole in the China story and ran through it.

Engine-maker Cummins and chip-maker Advanced Micro Devices, meanwhile, were more explicit. Both cut their revenue expectations, pointing in part to disappointing sales in China. In May Estée Lauder, the luxury cosmetics company, also expressed worries about the direction of China’s economy.

Everybody loves an excuse. Recall the SARS epidemic of 2003, which allowed companies from Kodak to San Miguel to blame the virus for sapping sales. True, when it comes to high fashion, China does really set the pace for the likes of Louis Vuitton, Burberry and Prada. The latter’s same-store sales grew by an annual 24 percent in China in the last quarter. Such trinkets are driven by sentiment, which can change quickly.

Construction equipment, too, is highly responsive to the economy. China’s stimulus-led building boom was catnip for Caterpillar, Komatsu and Cummins. Now much building work is on hold, and to make things worse, Chinese rivals have been aggressively building market share by extending credit to customers. A slowdown is inevitable.

But investors have to read between the lines. Last year, only 8 percent of Cummins’ sales came from China, and just one twentieth of its sales growth. Chipmakers face bitter competition regardless of what China’s economy is doing. And luxury companies, which mostly don’t report the quantum of their revenue from China, can’t be too surprised if investors think it’s bigger than it really is. The China slowdown is real, but investors can’t blame the Beijing bureaucrats for everything.

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