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How 3 stocks tied to China’s economy are navigating its uneven post-Covid recovery

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6 months ago

October 30, 2023

There are signs that China’s economic stumbles are starting to stabilize. But looking at quarterly numbers and commentary from multinational companies doing business there, the road back for the world’s second-largest economy remains uneven. This paints a fuzzy picture for our stocks that generate lots of revenue in China — Estee Lauder (EL), Starbucks (SBUX) and Wynn Resorts (WYNN) — as they get ready to report their quarterly results. While the end of pandemic restrictions in China this year released pent-up demand for in-person services, travel, and entertainment, there has been a cap on momentum due, in part, to high youth unemployment and a troubled real estate market. That’s why China is once again looking to pull fiscal and monetary policy levers to reach the government’s 2024 economic growth of 5%. Encouraging signs can be found in recent data from the Chinese government and casino operator Las Vegas Sands . Retail sales in China for September, the final month of the third quarter, handily beat estimates with a 5.5% increase. August and July sales were 4.6% and 2.5%, respectively. Las Vegas Sands beat on revenue and matched estimates on earnings. Stronger numbers in Macao indicate some buoyancy in the Chinese consumer and tourism in Asia. However, there are cautionary signals from a couple of other companies and the latest read on Chinese gross domestic product. Following fiscal third-quarter earnings, L’Oreal CEO Nicolas Hieronimus said he “was not super impressed” by the slow Chinese market, noting experienced weakness in Asia travel retail sales. Club name Procter & Gamble (PG) flagged weakness in China when it reported its fiscal first quarter 2024 earnings. “Underlying market growth [in China] is soft and choppy as consumer confidence remains weak,” Andre Schulten, chief financial officer of P & G, said during the company’s post-earnings webcast. China reported better-than-expected economic growth of 4.9% in the third quarter. But that’s lower than the 6.3% in the second quarter and about equal to the first quarter — kind of a one-step forward one-step back situation. Let’s read the tea leaves in these crosscurrents out of China to see how Estee Lauder, Starbucks and Wynn Resorts might fare when they deliver their earnings next month. EL YTD mountain Estee Lauder YTD The remarks from L’Oreal’s CEO amplify what Wall Street is expecting when Estee Lauder reports fiscal 2024 first-quarter earnings before the bell on Nov. 1. Analysts see softer sales for the quarter due to continued softer activity in Asia travel and weaker luxury consumption. Deutsche Bank sees Estee Lauder’s top line falling 12% and a wider loss than the Street consensus. The analysts also believe investors are anticipating a softer outlook for the current quarter and for fiscal year 2024 due to concerns stemming from the company’s Asia business, which is EL’s growth engine. Deutsche Bank has a buy rating on Estee Lauder but lowered its price target to $173 per share from $192, citing lower estimates. Estee Lauder needs more time for inventories in its Asia travel retail business to normalize and demand to pick up in order for its financials to turn around. As travel in China normalizes, EL’s revenue and earnings will get a meaningful boost, but it’s taking much longer than we anticipated. We’re specifically focused on a travel recovery in the Hainan province — a popular destination for Chinese tourists that’s expected to see an influx in duty-free sales. This recovery will take at least another quarter or two so we have to be patient. We expect slow growth throughout the rest of 2023 and improvement in 2024. When we see improvement, the stock should go higher so it makes sense to keep holding it. SBUX YTD mountain Starbucks YTD Given P & G’s remarks, we hope Starbucks is still able to keep its China numbers moving in the right direction. The coffee giant is set to release its fiscal 2023 fourth-quarter results before the opening bell on Nov. 2. Following the positive numbers company out of China last quarter , we hope to see continued momentum. Starbucks’ growth in China, its second-largest market after the U.S., is still in its early stages. As of last quarter, Starbucks had a total of 6,480 stores in China, getting increasingly closer to its goal of reaching 9,000 stores there by 2025. Starbucks has more than 37,000 worldwide. There are over 16,000 in the U.S. More recently, there’s been concern that local competitors are getting promotional to take share. In a recent note, Wells Fargo estimates fiscal Q4 earnings-per-share for Starbucks to come in 22% higher than last year at 99 cents (a couple of cents above the Wall Street consensus) and revenue growth of 9.6% to $9.22 billion. The analysts see a 2.5% increase in China same-store sales in fiscal Q4 — more in line with fiscal Q2’s advance and way slower than fiscal third quarter’s 46% advance . On the same day as its upcoming earnings release, Starbucks will host an update on its Reinvention plan, which was implemented last year to enhance the customer experience and improve margins. During this event, we’ll be looking to see how the plan will drive business growth throughout 2024. WYNN YTD mountain Wynn Resorts YTD Commentary from Las Vegas Sands gives us hope that Wynn Resorts might be able to continue last quarter’s momentum in gross gaming revenue in Macao. Wynn is set to report its third-quarter earnings on Nov. 8. Analysts expect revenue to increase 77% from the year-ago period to $1.58 billion and earnings-per-share are expected to come in at 75 cents versus last year’s loss of $1.27. HSBC said in a Monday research note that Wynn has several growth drivers including its expansion in Macao and its newer property investment in Dubai. Outside of gaming, the analysts believe that non-gaming revenue, which includes things like entertainment shows, conventions, and exhibitions, could add to further revenue upside. The note said, “Wynn Macau is well positioned to leverage non-gaming expansion to gain market share.” (Jim Cramer’s Charitable Trust is long EL, SBUX, WYNN, PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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An employee services in a Starbucks coffee truck at Wuhan International Plaza on October 6, 2022 in Wuhan, Hubei province, China.

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There are signs that China’s economic stumbles are starting to stabilize.

But looking at quarterly numbers and commentary from multinational companies doing business there, the road back for the world’s second-largest economy remains uneven.

This paints a fuzzy picture for our stocks that generate lots of revenue in China — Estee Lauder (EL), Starbucks (SBUX) and Wynn Resorts (WYNN) — as they get ready to report their quarterly results.