January 26, 2012 / 7:33 PM / 6 years ago

Cooling China worries some multinationals

(Reuters) - Slowing growth in China is emerging as a concern in some of this quarter's earnings reports from U.S. multinationals that have long relied on strong growth in China and other emerging markets to drive their profits.

Though China's economic growth is still well above that in other economies, its efforts to cool that growth -- for example, by restricting credit -- are now translating into weaker sales at some U.S. companies that do business there.

The trend is not yet widespread and companies are quick to stress the many advantages of China's market, but the commentary this earnings season has taken a more cautious tone.

3M Co's (MMM.N) Asia-Pacific sales rose 3 percent in the latest quarter, weaker than in recent results, reflecting softer demand in China.

"The Chinese government successfully slowed activity to stem inflation," 3M Chief George Buckley said on a conference call with analysts. "Our China team anticipate continued below-trend growth in the first half of 2012."

The maker of Post-It notes, Scotch tape and components for consumer electronics reported net earnings of $954 million, or $1.35 per share, beating estimates by 4 cents a share.

One weak spot was the company's display and graphics segment, hurt by what 3M called "deteriorating" demand for consumer electronics. The business showed its largest sales declines in Asia Pacific.

Another global manufacturer, Eaton Corp (ETN.N), singled out China as one of several factors behind its sales miss.

The maker of electrical control systems and auto and truck components reported a disappointing quarterly profit on Thursday, saying U.S. customers delayed major projects, Europe's economies hurt sales, and tight credit dampened China sales of electrical equipment.

"They had to slow growth down because inflation was taking off very quickly," Chief Executive Sandy Cutler said in an interview, adding Brazil and India have also slowed and that China's leaders are "now talking about easing credit, and it's likely to take some time for the easing (to take effect)."

U.S. companies have received an earnings boost in recent quarters from emerging economies at a time when many U.S. end-markets were struggling or growing only feebly. Recent economic data, however, hinted U.S. economic growth may be a bit faster than was expected a few months ago. Friday's report is expected to show U.S. GDP accelerated to a 3 percent rate in the fourth quarter, from 1.8 percent in the third.

Eaton shares were down 2 percent at $48.54 and 3M was up 1.2 percent at $87.55 on Thursday afternoon.

SINGLE-DIGIT GDP GROWTH

"A lot of the growth prospects for these companies overseas have been (dependent) on what happens in China," said Catherine Avery, president and CEO of CAIM LLC, which holds Eaton shares as well as Illinois Tool Works Inc (ITW.N) and Emerson Electric Co (EMR.N), which have not yet reported results.

"If they do slow, it's going to be an issue," she said, adding that economic growth of 8 percent, though down from 11 percent, is still pretty good compared with the rest of the world.

China, like the United States, is affected by Europe's debt problems and slowing euro zone economies, Avery said, so until investors obtain clarity on how Europe resolves its issues, long-term corporate forecasts need to be taken with a grain of salt. Many companies are rightly sticking to very broad 2012 forecasts.

To be sure, any China slowdown may well be short-lasting. 3M's chief operating officer, Inge Thulin, said faster growth in China would return later in the year.

"Whatever challenges (emerging markets) present today pale in comparison to the opportunities," he told analysts.

Likewise, Caterpillar Inc (CAT.N), whose earnings blew away expectations, noted China has already restarted policies to support growth, and said it expects further easing is likely. It estimated China's economy will grow 8.5 percent in 2012, "sufficient for growth in construction and increased commodity demand."

The world's largest heavy machinery maker said net income for the fourth quarter was $1.55 billion, or $2.32 per share, compared with $968 million, or $1.47 per share, a year ago. That result was 59 cents above the analysts' average estimate, according to Thomson Reuters I/B/E/S.

Sales rose 35 percent to $17.24 billion, above Wall Street estimates of $16.05 billion.

Caterpillar said Thursday construction machinery sales have declined in China, but noted that parts sales have performed better. Sales in other Asia/Pacific countries are much better than in China, the company said.

Signs of a China slowdown cropped up in the results of two other multinational companies this week, and affected investor sentiment toward a third.

At United Technologies Corp (UTX.N), which reported results on Wednesday, slowing Chinese elevator orders were a factor in weaker-than-expected revenue growth.

TE Connectivity (TEL.N) reported disappointing results. The electronic connector maker's communications and industrial solutions business reported lower sales both year-over-year and sequentially. Within that business, appliance sales fell amid weak new home construction and fewer government incentives in China, the company said.

Meanwhile option investors appear to have worries about Yum Brands Inc (YUM.N), taking out protection against a share price decline ahead of the fast-food chain's report next month.

Prospects of slowing Chinese growth and unfavorable exchange rates, the same factors that threaten rival McDonald's Corp (MCD.N), are worrying investors, analysts say.

Additional reporting by John Stoll in Detroit, editing by Dave Zimmerman and Matthew Lewis

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