Sector Analysis: Who Has the Most to Lose in a U.S. vs China Trade Dispute?

The U.S. – China trade dispute has been dominating headlines for months and shows no signs of easing anytime soon.  Worry and caution on behalf of both investors and corporate management has been widespread, and at this point, repetitive. This presents us with a unique opportunity to look for companies or sectors where gaps exist between positive expectations and Trade War risk.

How are we conducting the analysis?

We used the Query Insights feature in Amenity Viewer to identify positive earnings sentiment around China, tariffs, trade, etc. from earnings calls this past quarter.

Please note: This in no way represents investment advice. All transcript text provided by S&P Global Market Intelligence.

Where did the sentiment analysis lead us? The MedTech sector.

This industry was initially exempt from tariffs, but that exemption was lifted in September. In this most recent quarter, we saw a cluster of bullish commentary of China from MedTech companies.

One More Shoe to Drop in the Trade Dispute?

Could the current optimism be the prelude for future disappointment as the more recent tariffs take effect? Investors only need to look to the 2Q/3Q issues in the Auto sector, which have been hit by the double-whammy of direct tariffs in addition to raw material inflation.  

When we examined MedTech's underlying earnings sentiment, three common themes emerged:

1. Broad-based recent strength in China

2. Some acknowledgment of China trade issues

Which was more than offset by... 3. Optimism regarding the ability to side-step the tariff headwind.

We highlight representative management commentary below:
  • Varian Medical Systems: October 23, 2018

"The strength of our China business is outstanding. We had a double-digit growth rate in the fourth quarter, building on several years of market share growth, and we remain committed to our customers and maintaining our growth in China."

"We’re working through this U.S., China trade disputes. It’s very important to us that be resolved for lots of reasons. But from a market point of view, at least so far, we’re seeing a robust market environment as the government continues to invest in cancer services."

  • Waters Corporation: October 23, 2018

"Asia,our largest region in terms of revenue, was up 7% in the quarter and double-digit growth in China"

"The Chinese situation possible has some effect linked to the broader trade dynamics in China, but we have a robust overall global franchise in TA and expect that to bounce back in Q4."

"From a tariff standpoint,because the vast majority of our products come in from places other than the United States, we’ve seen less of a direct effect. I did mention earlier that the TA Instruments product line, which is the one product line for us that comes in from the United States, has seen some delays between the order and sales cycle or elongated sales cycle, whether or not that’s tied to trade type activities, we’re watching that closely  But when we step back and look at the big picture of China, when it all comes together, it’s been a very solid story all year long, and our current assumptions call for the continuation of that trend."

  • Becton, Dickinson and Company: November 6, 2018

"Growth in China was a strong 13.6% in the fourth quarter, bringing the total year growth rate to 13.2%. This was driven by double-digit growth across all 3 segments."

"We expect to have good performance across all of our business segments in China."

"Tariffs,we’re going to be working with our suppliers to resource the base.  Now that takes a while.  We won’t expect to see much more impact in ’18, but that would help mitigate the impact in ’19, and perhaps whatever we can mitigate actually becomes a tailwind for us."

  • Agilent: November 19, 2018

"The overall view of China was very positive for the quarter.  And as we look at next year, I think Bob and I were talking about this earlier.  We’re guiding – embedded in our guidance assumptions is high single-digit growth in China for next year.  And despite all the noise that’s out there,what’s really happening on the ground is a lot different."

  • Bio-Techne Corporation: October 30, 2018

"The war on terror between U.S. and China has had minimal impact on our growth in China and we don’t expect that to change."

  • Bruker: November 1, 2018

"Our China BSI order rates in the last 3 quarters have been quite robust. Year-to-date,through the third quarter, we’ve not seen any significant impact from the trade dispute between China and the U.S. on our financial performance."

  • Danaher: October, 18, 2018

"You’ve seen tremendous strength in our China business to this point. I mean, China was up double digits in the third quarter, and it was the seventh consecutive quarter of double-digit growth for us. So right now, we feel pretty good about where we are in China, but there’s certainly room for a little bit of caution relative to any, as I said, second derivative impact on growth coming out of those markets."

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Transcript text provided by S&P Global Market Intelligence.

Copyright ©2018. All rights reserved.

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