January 10, 2012 at 08:55 AM

BY Dennis Hobein - Contributor, Stock Traders Daily

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Our Trading Reports in this Article:

• YUM
• WYNN
• ADI
• QCOM
• BRCM

Over the past year plus, the one clear, undeniable positive catalyst for the stock market has been corporate earnings. Despite a multitude of economic headwinds both here and abroad – particularly in Europe – corporations have still managed to churn out impressive top and bottom line growth. There are two primary factors that have allowed this: 1). Following the “Great Recession”, companies have become more efficient & productive with lower costs and smaller work forces; and 2). Economic growth in emerging markets such as China have offset slow, or no growth in mature markets. As we head into the fourth quarter earnings season and into 2012, we wanted to particularly take a closer look at the latter point.

There is some debate among analysts and pundits about whether China is heading for a “hard landing”, or whether this economic growth is sustainable. Our view is, the risks for a slowdown in China are rising and looking more probable, which would translate to slower EPS growth and multiple contraction for many U.S. stocks. In his December 13 column, “2012 Outlook”, Tom Kee Jr, President and CEO of Stock Traders Daily, stated, “The wildcard is China, and in 2012 I expect China to become a material negative to the global economy…the actions being taken by China to lower interest rates and combat slower growth is yet another in a series of variables that tell me China will come under pressure…” Members of Stock Traders Daily already have access to the full article; click here to access the sign-up page for a free 10 day trial.

With this less-than-optimistic outlook, we wanted to see which companies have benefitted the most from their exposure to China – and conversely, which may be set-up for dramatic slowdowns should China become more of a headwind this year.

Fast Growth For Fast Food Giant

Yum Brands (NYSE:YUM), the operator of fast food chains such as Taco Bell, KFC, and Pizza Hut, is one of the most highly-exposed companies to China, and has been opening new restaurants in the country at a break-neck pace. In fact, the company is planning to open about 600 new restaurants in China this year alone, so YUM is clearly making a large bet on China. Thus far, this aggressive strategy for new store growth has worked out very well. It exceeded analysts’ Q3 expectations and boosted its FY12 EPS growth expectations to “at least 13” from 12% in early December. This helped push shares to new all-time highs recently, and shareholders have basically enjoyed a steady uptrend since the end of the recession back in early 2009. However, should economic growth in China slow, the tables could turn quickly on YUM. Its valuation also warrants monitoring as it trades with a trailing P/E north of 23x.

YUM is expected to report earnings on Feb. 6, with analysts expecting EPS of $0.74 on revenue of $4.0 billion.

WYNN Betting Big on China

While the Vegas Strip continues to deal with a major hangover following the recession, the party continues to rage on in Macau (China). Wynn Resorts (Nasdaq:WYNN) owns and operates the Wynn Las Vegas and Encore, but also operates Wynn Macau and Encore Macau, which accounts for more than 70% of its total revenue. There is some worrisome evidence of a slowdown in the Macau market, though. After gross gaming revenue climbed by 33% in November, growth slowed to 25% in December. Overall for 2011, gross gaming revenue was up 42% in 2011 compared to 58% in 2010. The stock has not been acting well, either, sliding to about $107 from $165 this past summer, suggesting that investors are concerned about a bust in Macau.

WYNN is expected to report earnings on Feb. 9, with analysts expecting EPS of $1.29 on revenue of $1.36 billion.

Handset Growth in China Fueling Semis

Of course, one of the fastest growing industries in China has been technology and communication, as smart phones and handset growth has been explosive. Because of this, tech companies that manufacture components, semiconductors, and/or license technology to cell phone OEMs have benefitted greatly. Here are a few that have high exposure to China:

Analog Devices (NYSE:ADI) makes high-performance semiconductors and digital processing integrated circuits, and generates about 20% of its revenue from China. It is coming off a poor fiscal Q4, missing on both the top and bottom lines, in addition to issuing downside Q1 guidance, citing a slowdown in order rates and a reduction in inventory levels from customers… Qualcomm (Nasdaq: QCOM) is the licensor of “CDMA” technology for smart phones and generates roughly a quarter of its revenue from China. The stock has been mired in a “sideways chop” for about a year, but it does have a couple potential catalysts ahead this year. Namely, growth in LTE smart phones, the launch of its 8960 chipset, and Win8… Broadcom (Nasdaq: BRCM) manufactures semiconductors that are used for wired and wireless telecom products, that enable the delivery of voice, video, data, and multimedia. It derives over 30% of its revenue from China. The stock has had a rough ride since early 2011, going from about $47/share to $31 today. Its recent weakness can be attributed to its weak Q4 guidance due to cautious demand from customers, and an acquisition of NetLogic which has failed to impress investors.

ADI is expected to report earnings on Feb. 15, with analysts expecting EPS of $0.48 on revenue of $662 million; QCOM is expected to report earnings on Feb 1, with analysts expecting EPS of $0.90 on revenue of $4.56 billion; BRCM is expected to report earnings on January 31, with analysts expecting EPS of $0.64 on revenue of $1.8 billion. 

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