From: James Cramer
Sent: Wednesday, September 19, 2012 11:14 AM
To: Nicole Urken
Subject: China
Everyone’s worried about China. So few people trust the numbers… Funny thing though, When everyone thinks one way, perhaps you have to revisit the data. When everyone has decided to write off China you have to take a second look to see if the judgment’s premature.
From: Nicole Urken
Sent: Wednesday, September 19, 2012 11:21 AM
To: James Cramer
Subject: RE: China
Opportunities remain in our China derivative plays…
Worries on China abound, particularly after negative call-outs from the likes of Caterpillar and Federal Express leading into earnings season, putting pressure on China-levered names. However, there remain buyable pullbacks, as worries become priced in. Plus, likelihood of more easing—ie interest rates cuts and required reserve ratio (RRR) cuts—are not fully appreciated. The country’s incoming new Congress in November should be an important catalyst. Ultimately, while many China-levered names have pulled back, these are opportunities to keep an eye on if we get incremental positive data or indications of easing.
China derivative plays span from industrials to restaurants to retail to restaurants and more. So let’s take a look.
First up, kitty time. Caterpillar. Back on September 24th, the company lowered its 2015 EPS outlook to $12-18 from $15-20. Remember, CAT had announced 2015 guidance originally as part of a five-year plan, something that’s hard to predict in this volatile macro environment. A name that has continued to work toward its five-year plan more effectively is Dupont—a name which, Shawshank Redemption style (as Cramer says) has taken its fate into its own hands, getting busy living versus getting busy dying, reshaping its business to shed less profitable segments and specifically to focus on specialty. Back to CAT though, while the update was disappointing, this macro-related revision was not surprising given other commentary throughout the year and is now largely priced in after the sell-off. At these levels, CAT could see some more downward pressure but is well-positioned to benefit from positive trends in US construction spending and incremental positives from China.
Also in the industrials related space, we can’t miss thinking about Federal Express. Expectations have been reset after the company’s disappointing preannouncement on September 4thand then even more disappointing quarterly announcement on September 18th. The catalyst for this name? Most important is its analyst meeting this week where we should hear details about its restructuring, with particular focus on its disappointing FedEx Express unit, at about 60 percent of revenues. Federal Express also is an interesting holiday play—a seasonal trade for the busiest time for year for packages (presents!) not to mention share-take from the US Postal Service as operations are reduced and continued secular shift to e-commerce vs brick & mortar shopping. At 11x forward estimates (about 3 turns below its five-year average and at a discount to UPS), this one is interesting here even considering the macro uncertainty.
Another transport name that is worth keeping on your radar is Union Pacific . This railroad is the best positioned in the group, even though it was hurt by the downside preannouncement at Norfolk Southernlast month. Union Pacific has less exposure to coal (and more exposure to cleaner coal…it is a western railroad) plus it has more upside from continuing contract re-pricing. The stock has been strong year-to-date but stands nicely off its highs.
Next up? The vice stocks, Las Vegas Sands and Wynn Resorts , both names which get the majority of their earnings from Macau. These have both been “fast money” names but ultimately remain good long-term superior growth stories. First and foremost, these are plays on the growing middle class in China. While many have called for an abrupt halt in Macau growth, the market is far from maturity. It is true that after growing 60 percent in 2010 and 40 percent in 2011, growth is currently slower, but this deceleration has been factored into the stocks. Las Vegas Sands is best positioned at this point given it is ahead in Cotai development, though both names represent interesting entry points here, especially with strong management teams at the helm under Steve Wynn and Sheldon Adelson, the latter of which has dominated Republican donation headlines. While the names have rebounded since summertime, they remain well off their April highs.
Turning to food. Of course, with growing populations in emerging economies like China (not to mention India and Brazil) we continue to have a long-term secular theme of the need to feed more people with limited land supply. While Mosaic and Monsanto both disappointed last week, these names remain well positioned. Mosaic’s President and CEO Jim Prokopanko specifically highlighted these long-term themes when he was on Mad Money last Tuesday—check out the interview here.
And from grains to fast food: Don’t forget Yum! Brands—known for Taco Bell, Pizza Hut, and KFC, which reports this week. While many are familiar with the names’ presence in the US, the real driver for the company is China, at over 50 percent of profits. In addition to same-store sales growth, the company could double China units by 2020 as penetration is one-twentieth the US’s and as the middle class continues to grow. If this quarter disappoints, it could be a buying opportunity as the long-term story here remains strong largely because of China but also other emerging markets and continued improvement in the US.
Who else? Yahoo . While the connection to China is not intuitive to some, Yahoo is a story about unlocking value, much of which is connected to its stake in Alibaba. As we discussed recently on Mad Money, the sum-of-the-parts argument has been made many times, but it hasn’t mattered until now, as there was no real strategy to bring out the value with multiple management changes and no clarity. However, with (new mother!) Marissa Meyer at the helm, we now have a leader with an engineering background ready to focus on a mobile and social strategy. And, with the first half of Yahoo’s 40 percent stake in Alibaba sold, we finally know they mean business, and that could mean more cash to shareholders.
Lastly, of course, we can’t talk about China without talking about the retail derivative plays: Coach , Nike and VF Corp . Nike has the most leverage to China (at over 10 percent of its sales) but while China represents just 5 percent of sales at VF Corp and 6 percent at Coach, the region represents the area of accelerating growth for both. Coach and Nike both have been pummeled by disappointing results of late. Coach concerns remain over growth in China and also encroaching competition in the value luxury category from the likes of high-octane Michael Kors (KORS). However, with strong leadership Lew Frankfurt, this remains a well-positioned long-term name. Nike margins were concerning, along with its futures orders (key metric for the company) in China, but in the low $90s, the name looks intriguing. For a name with a bit more momentum, look no further than VF Corp , the company behind North Face, Nautica, Timberland, Lee, Wrangler and Seven for All Mankind. VFC has become a powerhouse of the outdoor action category, especially after its Timberland acquisition, and the category is the company’s fastest growing one. As a side note, the bankable President and CEO Eric Wiseman—who came on Mad Money this past Wednesday —should consider buying up the flailing Deckers or consider another junior-growth name Columbia Sportswear. Under Armour or Lululemon might be big bites but ultimately merger permutations in this hot space shouldn’t be cast aside for the acquisitive VFC. Not to mention, here is another winter-boost stock, as over one-third of its sales benefit from cold weather (think puffy coats and warm boots).
The bottom line: Keep these China plays in mind as we kick off earnings season. Of course, the first third quarter report we get, Alcoa , aptly kicking off with its double-A symbol, is largely be influenced by China. Remember that many money managers are playing catch-up into the end of the year, and pullbacks could call opportunities for them… and thus for you. There is no question that China is not the growth monster it once was, but this is largely priced in, and more easing opportunities remain ahead.
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