Chinese growth figures released this week showed that the second largest economy in the world grew at an annualized rate of 7.4% in the first quarter of 2014. A pretty good number, I'm sure you'll agree. Except that China is targeting GDP growth of 7.5% this year, so it's a little behind target.
This got me thinking about China and its journey from growth that's driven by investment in vast infrastructure projects toward growth fueled by the consumption of goods and services. Sure, 7.4% growth might not be as good as 7.5%, but it still highlights the opportunity for US consumer goods companies over the long run. Although many US brands are in China at present, here are three stocks that I think could be major beneficiaries from continued strong GDP growth in China, and that also look attractive at current price levels.
Coca-Cola's adaptability could be its key growth driver
Despite a continued war on sugar-sweetened drinks across much of the developed world, Coca-Cola (NYSE:KO) continues to post encouraging growth numbers. For instance, 2013's earnings per share (EPS) were $1.90, and this is forecast to grow by 10% in 2014 and by 7.2% in 2015, both of which are impressive rates of growth.
Indeed, Coca-Cola seems able to adapt successfully to changing tastes and fashions. With an increasing focus across the developed world on health and well-being in recent decades, Coca-Cola has not stood still, but rather has developed sugar-free varieties and even vitamin-enhanced versions of its popular products. Sure, they may not be quite as successful as "the original," but they show, crucially, that Coca-Cola is able and willing to adapt to changes in tastes. This attribute could prove vital as China (and the rest of the emerging world) develops, as Coca-Cola is able to offer more localized products to enhance sales.
Evidence of Coca-Cola's popularity in China could be seen in the most recent quarterly update from the company. Case volumes in China were up 12% (versus the first quarter in 2013) and were boosted by a marketing campaign around the Chinese New Year Holiday. Coca-Cola also confirmed it plans to invest $8 billion over the next five years in China.
Encouragingly, Coca-Cola is not extremely expensive at current price levels. Although its forward price to earnings (P/E) ratio is higher than that of the S&P 500 (18 versus 15.4 for the index), the strength of Coca-Cola's brand and its medium term growth prospects mean that it still represents good relative value at current price levels.
Procter & Gamble's brand positioning could prove crucial
Clearly, a rise in consumer spending is likely to be good news for a consumer goods company such as Procter & Gamble (NYSE:PG). However, where Procter & Gamble could really benefit from further Chinese growth is in terms of the price point of its brands. Although they cater for everyday requirements (such as grooming and household care), Procter & Gamble's brands tend to be aimed at the middle market of their segment; offering a potent mixture of high quality and good value.
In other words, Procter & Gamble's brands do not compete solely on price, but rather on quality and reliability. This, I feel, makes them well-suited to China's consumer-led growth story, where many Chinese are likely to demand better quality consumer goods as opposed to just consumer goods in general.
Furthermore, Procter & Gamble continues to offer relatively good value and has a forward P/E ratio that is comparable to that of Coca-Cola. Procter & Gamble trades on a forward P/E of 17.9 which, although higher than the forward P/E of the S&P 500 (15.4) looks very reasonable when the medium term growth prospects of the company are factored in. For instance, Procter & Gamble's EPS figure is forecast to grow by 13.4% to the end of June 2014 and by 7.8% to the end of June 2015.
Nike's marketing strength is a major asset
What really impresses me about Nike (NYSE:NKE) is how conservative the company is when it comes to its balance sheet. For instance, it has a debt to equity ratio of just 12% and is clearly aiming to keep the riskiness of its balance sheet to a minimum. Where it has potential in China is in its ability to quickly become relevant to potential customers. For example, Nike already has a foothold in a number of major global sports and is able to adapt to local tastes through campaigns such as sponsoring local sports stars, designing and supplying merchandise for local sports teams to gain exposure to supporters, as well as having a reputation for quality products at reasonable prices.
Therefore, Nike has the ability to quickly respond to new and changing popularity of sports in emerging markets through its marketing machine. Although it trades on a forward P/E of 21.6, the conservative nature of its financing and vast growth potential (for example, EPS is forecast to grow by 13.8% in the year to May 2015) mean it still looks attractive at current price levels.
Looking forward to growth potential
So, while Chinese growth numbers were slightly below their target, it still appears to be the land of opportunity. This is no more true than for consumer goods companies such as Coca-Cola, Procter & Gamble and Nike, that have the products, flexibility, adaptability and growth prospects, I feel, to merit their current price. Indeed, China's consumer-led growth period could prove to be an exciting time for all three companies.