China Trade News
The China trade conflict is rocking the stock market, but a strong consumer is keeping markets afloat. Increased consumer spending helped three major retailers post big beats on earnings this weak, giving investors hope that the decade-long bull market still has room to run.
Wal-Mart (WMT), JD.com (JD), and Ali Baba (BABA) beat consensus earnings estimates after consumer strength in both U.S. and China fueled better-than-expected revenues over the previous three months.
The reports bolstered the bull case for the consumer as markets move closer to the holiday season.
Wal-Mart posted a strong report yesterday morning that swung the S&P 500 into positive territory, shaking off weak early morning futures data and providing some reassurance for panicky traders.
Same-Store Sales grew more than consensus estimates predicted, clocking in at 2.8% versus Wall Street’s 2.5% target. Wal-Mart posted $130.4 billion in quarterly revenues and surpassed consensus estimates by roughly $330 million. Earnings also beat estimates, earnings per share of $1.27 topped consensus estimates by 5 cents.
Most notably, Wal-Mart raised it’s full-year growth targets in response to continuing U.S. consumer strength.
Chinese e-commerce giant JD.com also performed well on this week’s quarterly earnings report. Strong revenues in the company’s core e-commerce business helped deliver big beats on both the top and bottom lines.
Earnings per share of $0.33 topped estimates by 25 cents. The 312.5% beat was the largest of this group. JD’s revenues also came in $393.88 million ahead of expectations, totaling $21.35 billion USD for the quarter.
JD is one of the largest e-commerce vendors in Asia. With a market cap over $44 billion, it’s second only to Ali Baba in the Chinese e-commerce sector. The beat reflects a strong Chinese consumer that continues to spend despite the pain inflicted by U.S. tariffs.
The largest e-commerce firm in China also benefited from strong consumer spending in China. Baba surpassed consensus estimates for both earnings and revenues.
Net income grew 150% year-over-year and totaled to $16.741 billion USD, surpassing consensus estimates of $15.85 billion. The surprise income beat boosted EPS to $1.78; 30 cents above analyst expectations.
CFO Maggie Wu cited “sustained user engagement and consumer spending across our platforms” as the driving force behind Baba’s strong quarter. Baba’s retail marketplaces continue to exhibit strong growth in its core e-commerce business, which grew 42% YoY.
Despite widespread signs of economic uncertainty, consumer spending appears to be strong. Earnings from retail institutions like these often serve as an accurate bellwether for economic health. Despite weakening GDP growth in both the U.S. and China, consumers are doing well. The U.S. consumer confidence index is at multi-year highs and unemployment is at record lows.
Chinese consumer confidence numbers are at record highs. The last time the consumer confidence in China touched current levels was in the mid-1990s. Continued consumer spending could help China fend off a recession as trade tensions continue to rise.
Retail looks like a buy in this economic climate, but not all retail stocks are performing this well. Buying strong companies with a track-record for strong management and execution is likely the best way to play the trend. Companies that are executing poorly or facing difficulties relating to the China trade dispute are getting hit hard in this environment, so buying the entire sector is probably not the best way to approach this potential opportunity. Instead, look for quality companies with experience management that have a track record for consistency and performance.
Be sure to keep an eye out on August 27th for the latest Consumer Confidence figures.
The consumer is strong, but buying individual stocks is likely the best way to play the trend.