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Are Emerging Markets Back?

Strong contributions from emerging markets are helping U.S. companies post the best earnings growth in years


There’s so much handwringing over China these days — and so many other big emerging markets are tanking (cough, Russia) — that’s it’s easy to miss how much the emerging markets are driving corporate outperformance.

Indeed, this earnings season is shaping up to be one of the best in years, helped in large part by renewed strength among emerging markets.

True, Russia almost single-handedly ruined Adidas’ (ADDYY) quarterly results — and in shocking fashion too. Adidas was supposed to have a huge year, thanks to the World Cup. Instead, the crumbling ruble forced the company to slash its guidance.

Intel (INTC) is another company that failed to get any benefit from emerging markets last quarter. As INTC said when it posted earnings, “the consumer segment remains challenging primarily in the emerging markets.”

But those examples tend to be the exception, not the rule, and that’s helping the S&P 500 to a Street-beating quarterly earnings season.

We’re about four-fifths of the way through second-quarter reporting season, and we’re on track for earnings growth of 7.5%, according to data from FactSet. Not only does that clobber estimates for 4.9% at the start of the season, but its the second-best growth rate for the S&P 500 since 2011.

Emerging Markets to the Rescue

emerging markets stocksA disproportionate part of that growth is still being driven by cost cuts, but pink slips aside, emerging markets look like they’re back big time. For all the worries about growth in China or Brazil — and the geopolitical nightmare that is Russia — emerging markets are still pulling their weight when it comes to corporate revenue and earnings.

Here are five major companies talking up the importance of emerging markets in their Q2 earnings, according to FactSet:

Yum Brands (YUM) earnings were overshadowed by the latest food scandal in China, but profit beat Street estimates thanks to a rebound in emerging markets, particularly its KFC operation in China. Other major emerging markets also saw strong growth. As Yum noted in its report: “China Division system sales increased 21%. Operating profit increased 188%. India Division system sales increased 18%.”

Johnson & Johnson (JNJ) eclipsed analysts’ average estimate by 11 cents per share on an adjusted basis, thanks to a 9.1% increase in revenue. The company said the emerging markets of Brazil, Russia, China and India (BRIC) were vital to that performance: “Overall we had about 10% growth on an annual basis so far in BRIC, and we’ll expect that to continue into the future as well.”

Nike (NKE) beat estimates on both the top- and bottom lines by comfortable margins last quarter, helped by strong revenue growth in emerging markets. That’s a critical reversal from the weakness in China it saw last year. From Nike: “Emerging markets … delivered exceptional Q4 results, with revenue up 25%. These results were very well balanced, with double-digit growth in almost every territory and increased revenues in nearly every key category.”

McCormick & Co. (MKC) is more dependent on emerging markets than ever. Earnings beat estimates even as revenue fell short of target, hurt by declining sales in the Americas. Fortunately, the Asia-Pacific region came to the rescue: “Our base consumer business in China also achieved double-digit growth this period … China’s on track to be our second largest country this year in terms of annual sales.”

General Mills (GIS) actually missed analysts expectation by a wide margin, hurt by a 3% drop in revenue. But that’s because packaged food companies are suffering from lower demand in the U.S. In the case of GIS, revenue is under pressure from lower sales of key brands like Betty Crocker, Cheerios and Pillsbury. China, however, remains healthy. As GIS noted: “In the Asia-Pacific region, constant currency sales grew 9% to exceed $980 million driven by another year of double-digit growth in Greater China.”

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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