Cadillacs and Fried Chicken: If China Slumps, GM and YUM Brands Get Hurt

Investors in Asian stocks are stuck on a roller coaster ride these days as the pundits place bets about how far the Chinese government will go to reinvigorate economic growth there. It’s probably a good time for investors in U.S. companies to check out how the politics of a Communist regime might affect their own portfolios.

That’s because for many fine American companies, the strength of China’s economy matters. A lot.

It particularly matters for a company that relied on China and its 9.2%-to-10.4% GDP growth in recent years to prop up not-so-stellar sales gains in the rest of the business. Lots of U.S. companies fall into that category. Some of them are big brand names whose shares rose considerably on the back of recent Asian success. If China’s powers-that-be decide to let the country’s high-level of growth fall off naturally, those year-on-year comparisons could look ugly.

We should point out that China’s economic growth is still the envy of the Western world. The World Bank forecasts China’s real GDP growth at 8.2% this year. It’s the difference from a year ago – it was 9.2% in 2011 -- that could trouble corporate earnings. Here two examples of U.S. multinationals that have a lot at stake in China.

YUM! Brands (YUM)

Fast food company YUM has tapped into China’s growing consumer society more successfully than just about any U.S. company. More than 4,500 China-based KFCs and Pizza Huts provide about half of the company’s operating profit. While profits and sales declined in the U.S., YUM’s China restaurants reported 21% same store sales growth last quarter. Overall, YUM’s worldwide operating profit for the first quarter was up 15%. China operations reported a 14% gain.

The China success is the key reason YUM investors have more than doubled their money since the recession.

YUM data by YCharts

It’s also the reason YUM’s PE ratio has soared above McDonald’s (MCD). YCharts gives YUM mere average ratings for share price value.

YUM PE Ratio data by YCharts

YUM stock retains a significant number of buy recommendations on the belief that whatever headwinds China may encounter, its appetite for fried chicken and pizza can be sustained. But any real slowdown in China’s consumer spending will quickly hit YUM’s bottom line.

GENERAL MOTORS (GM)

General Motors sold more cars in China last year than it did in the U.S., and it plans to double deliveries there by 2015. Much of this strategy focuses on Cadillacs and SUVs, which are an awful lot more expensive than a bucket of chicken. An economic slowdown in China is expected to hurt the car industry a lot more than fast food.

But GM’s varied product line – more than 60 new models or redesigns for China over five years – is expected to go a long way toward keeping GM’s title as largest foreign automaker there. GM already showed some quick reflexes on this front last year, when demand for commercial vehicles there slid. It amped up marketing for light trucks and cheap sedans and managed to maintain sales but suffered slightly-eroded profit margins there.

GM really needs continuing success in China to offset problems in Europe, where it and its competition are likely to struggle with low demand and high costs for many months to come. Europe already eats away a lot of the company’s profits, and investors know it.

GM data by YCharts

However, GM shares are ridiculously cheap for a $35 billion market cap company that’s growing overall sales and earnings with every passing quarter. Its PE ratio registers at just 6.5. Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) bought 10 million shares for the long run earlier this year.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

Filed under: Investing Ideas