Four Stocks Ready to Ride China

U.S. markets have long had a vested interest in China’s growth. That’s why the latest stimulus attempt by the world’s second-largest economy is good news for one U.S. sector in particular.

Earlier this month, the Chinese government announced plans to devote $157 billion (or 1 trillion yuan) to improving the country’s infrastructure. New highways, railroads, ports and airport runways will be built – all for the sake of jolting life into an economy that’s in the midst of its worst slowdown in three years.  

The total cost of the 60 total projects equates to roughly 2.1% of China’s entire economy. While not quite American Recovery and Reinvestment Act (ARRA) money – President Obama’s 2009 economic recovery package that will cost $831 billion over a 10-year period – China’s stimulus effort represents a significant commitment for what is supposed to be a four-year project.

Such a large-scale infrastructure overhaul will, of course, benefit China’s myriad construction companies – namely its machinery and steel makers. But it will also mean a big payday for certain overseas construction companies – including publicly traded U.S. entities.

Here are four U.S. companies whose bottom lines are heavily influenced by China’s growth – and whose stocks stand to benefit from its recovery:

  • Caterpillar (NYSE: CAT): Shares of the world’s largest maker of construction equipment have shot up 8.5% since the Chinese government green-lighted the projects on September 7. That’s well ahead of the S&P 500’s 1.9% gains during that time. Better yet – Caterpillar’s stock is still trading at just 10.3 times earnings. Though China accounts for just 3% of Caterpillar’s sales, its slow growth of late has weighed on Caterpillar’s earnings. Nonetheless, China’s business is important to the company. That’s why Richard Lavin, who runs Caterpillar’s China operations, predicted the country’s stimulus plan will have a “broad and significant impact” on the company’s bottom line. If true, expect the stock’s resurgence to continue.
  • Consol Energy (NYSE: CNX): This Pennsylvania-based coal producer shipped 88,000 tons of metallurgical coal to Chinese steelmakers in 2009. The Consol-China relationship has only blossomed since, with the company shipping 4.8 million tons of coal to China in 2011 – accounting for almost half the company’s $1 billion in exports. So look for Consol to play a key role in China’s infrastructure improvements, as metallurgical coal is used to make iron and steel. Investors are already expecting Consol to get a bump from China’s expansion – shares are up 10.5% since the announcement.
  • Joy Global (NYSE: JOY): The mining-equipment developer has seen its shares rise a whopping 13.8% since September 7. That’s quite a turnaround. Just last month Joy’s stock dipped to a three-year low due in large part to the slowing Chinese economy dragging down second-quarter earnings. Now that China is spending big on infrastructure, its demand for mined products such as coal, steel and iron ore should increase – which should make for a better quarter at Joy.
  • U.S. Steel (NYSE: X): Things like railroads and bridges require a ton of steel – including imported steel. Since steel prices are determined globally, the specter of China’s stimulus projects likely has a lot to do with U.S. Steel’s 10.5% surge in the last 10 days.

To varying degrees, all four of these U.S. companies are dependent on China’s business. As China floundered over the first seven months of the year, their stocks fell by an average of roughly 20%. Now that China is serious about turning things around, these stocks are getting a jolt of new life.

While the turnarounds likely won’t last as long as China’s estimated four-year construction time, the large scope of the country’s planned improvements should be enough to boost earnings and keep the stocks running for quite some time.  

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