7 Stocks China's Yuan Devaluation May Threaten

NEW YORK (TheStreet) --  You already know this week's devaluation of China's currency is heightening concern that the world's second-largest economy is faltering and dragging down global markets. So what does it mean for you?

"Investors should be worried about the direct underlying companies [operating] in China," said Kevin Kelly, managing partner at Recon Capital Partners. The country's growing middle class, which has been the source of much of the demand for American and other foreign products there, is tightening, he said. Additionally, declines in the market may shake consumer confidence and hurt American firms that do business there.

The weak currency will create a strain on companies that import goods to China while allowing Chinese exporters to artificially sell their goods more cheaply in the world markets, thus bolstering revenue. It's unlikely a coincidence that the devaluation comes after Chinese officials reported over the weekend that July exports dropped 8.3% compared with a year ago. 

Now, analysts including Kelly worry that China's stock indexes as a whole, which rose 150% in the twelve months before June 12, may have seen a run-up similar to an earlier housing bubble. That may cause financial stress for companies that have spent years building their presence in China.

Those selling luxury items, such as handbags and shoes, took a hit after the recent devaluation, and other retailers with a strong presence in China are likely to suffer if the downward trend continues.

Here are 7 of the companies that stand to lose:




1. Johnson & Johnson

The New Jersey-based company reported a 9% drop in revenue in the second quarter, largely due to a stronger U.S. dollar, less demand for its hepatitis C drug and lower medical-device sales than expected. 

"We have seen, in China, some slowdown," Chief Financial Officer Dominic J. Caruso, said on an earnings call with analysts. "I wouldn't call it acute. There are some dynamics, of course, of a generic competition in China and an overall slower growth."

Separately, TheStreet Ratings team rates Johnson & Johnson, which has a market value of $271 billion, as a buy with a ratings score of A-. "The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, notable return on equity, reasonable valuation levels, expanding profit margins and growth in earnings per share," the team said. "Its strengths outweigh the fact that the company has had lackluster performance in the stock itself."


2. General Motors

Transportation products were the most valuable category of U.S. exports to China in 2014, with products worth $26 billion bound for the country from U.S. manufacturers. That included cars from American manufacturers such as General Motors (GM) and Ford (F).

When GM reported its second-quarter results, it beat analyst expectations on its business in China. While analysts welcomed the news, many still questioned the long-term effect of shrinking auto sales in the country. "We remain cautious given potential for further industry pricing pressures as the market struggles to digest 17% capacity additions in the face of likely negative sales growth," Barclays analyst Brian A. Johnson said in a July note.

The Detroit-based automaker is still betting big on China, though. Last year, it pulled its Chevrolet brand out of the European market but is keeping it alive in China through a partnership with state-owned Chinese firm Shanghai Automotive Industry Corp.

Separately, TheStreet Ratings team rates GM as a buy with a score of B+. "The company's strengths can be seen in multiple areas, such as its compelling growth in net income, good cash flow from operations, impressive record of earnings-per-share growth and notable return on equity," the ratings team said. "Its strengths outweigh the fact that the company has had generally high debt-management risk."



3. Boeing

China Eastern Airlines has brought Seattle-based Boeing (BA) plenty of business in the past two years. In 2014, the carrier ordered 80 of the manufacturer's narrow-body 737 airliners; earlier this month, it ordered 50 more. Together, those two orders are valued at as much as $12 billion.

Boeing has developed a close relationship with China's state-run carriers, and large orders have become common as more people in the country have the financial means to travel by air. If air travel starts to drop there, even because of consumer uncertainty, Boeing's business would take a hit.

Separately, TheStreet Ratings team rates Boeing as a buy with a score of B. "The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations and solid stock price performance," the ratings team said. "Its strengths outweigh the fact that the company has had sub-par growth in net income."



4. Altera and Freescale Semiconductor

China's surging economy was accompanied by an equally vigorous boom in infrastructure improvements. One beneficiary of the trend was the semiconductor industry, including manufacturers such as Altera (ALTR) and Freescale Semiconductor (FSL) that produce chips for wireless devices like smartphones.

With China now slowing the expansion of its high-speed wireless network, the industry's fortunes may be changing.

"We estimate that wireless revenues declined over 40% [quarter-over-quarter] and 50% [year-over-year] driven by a massive slowdown in China," BMO Capital Markets analysts Ambrish Srivastava and Gabriel Ho wrote in a note in late July, adding that they expect other companies in the sector to see similar losses.

Both Altera and Freescale are the targets of acquisitions announced earlier this year. In June, Intel (INTC) announced it was acquiring Altera in an offer worth $16.7 billion. In March, NXP Semiconductors (NXPI) said it would pay $11.8 billion for Freescale. Both deals are expected to close by the end of 2015.

Separately, TheStreet Ratings team rates Freescale as a hold with a score of C+. "The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance," the team said. "The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance and impressive record of earnings-per-share growth. However, as a counter to these strengths, we find that the company's profit margins have been poor overall."



5. Unilever

The food and household goods manufacturer has partnered with Alibaba to improve several components of Unilever's (UL) business in China, and the agreement will allow them to share e-commerce distribution channels.

Unilever made the decision less than a week after reporting a reduction in its China sales. The company acknowledged that it trimmed the inventory it keeps in the country, and said it made its move in online offerings in an effort to boost sales.

Companies like Unilever need to do well in the country because "consumer discretionary markets are completely dependent on China," Recon's Kelly said.



6. Yum! Brands

More than half of Yum! Brand's (YUM) sales last fiscal year came from China through the company's franchises of brands such as KFC, Pizza Hut and Taco Bell.

As in the U.S., though, eating out is a discretionary expense, which is usually eliminated or reduced when household budgets become less certain. It doesn't help that the company took a hit in a food safety scandal in the second half of last year.

Separately, TheStreet Ratings team rates Yum as a buy with a score of B-. "The company's strengths can be seen in multiple areas, such as its notable return on equity and solid stock-price performance," the team said. "Its strengths outweigh the fact that the company has had sub-par growth in net income."


7. Apple

By many measures, Apple (AAPL) has been doing well in China, from growth in the number of first-time iPhone buyers to revenue gains of 112% in "Greater China" (which includes Taiwan and Hong Kong in addition to the mainland).

That didn't stop CEO Tim Cook from acknowledging on the company's most recent earnings call that China's stock trouble could give Apple a headache. "It's true," he said responding to a question, "that the equity markets have recently been volatile. This could create some speed bumps in the near term."

One obstacle could come if a continued stock market correction shakes the confidence of China's middle class, which Cook said "is transforming China" and is the main reason why Apple has such a strong presence in the country.

Separately, TheStreet Ratings team rates Apple as a buy with a ratings score of B+. "The company's strengths can be seen in multiple areas, such as its solid stock-price performance, impressive record of earnings-per-share growth, compelling growth in net income, robust revenue growth and notable return on equity," the team said. "Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

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