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All Contents © 2020The Kiplinger Washington Editors
By Aaron Levitt, Contributing Writer
| January 27, 2020
A new coronavirus, 2019-nCoV, is starting to make its way across the world. The outbreak began at the end of 2019 in Wuhan, China; it has killed several dozen people, infected thousands more and spread to several countries, including the U.S., since then. Memories of the 2002-03 SARS and 2015 MERS outbreaks are popping back up – including on Wall Street, where several highly touted stock picks have been derailed by the health scare.
It's no small worry. The SARS outbreak not only tallied 774 deaths across more than 8,000 cases over a six-month period, but helped knock China's GDP down from 11.1% in the first quarter of 2003 to 9.1% in the second quarter. Depending on the estimate, it removed between $40 billion to $100 billion from the world's economy.
Like SARS, today's coronavirus outbreak also is happening at a troublesome time: the Chinese Lunar New Year. The heavy travel period is what helped spread SARS throughout Asia, and what could contribute to a faster spread of the coronavirus.
This health issue is weighing on America's broader stock markets, but it's particularly cutting into a few specific industries where the financial strain is already being felt. If there's any silver lining, it's that, like with SARS, this could end up being an opportunity to buy otherwise high-quality stocks at a discount for a potential snap-back.
Here, we look at eight stock picks that are being hampered by the coronavirus outbreak, but may eventually be attractive buy-the-dip prospects.
Data is as of Jan. 26. Stocks listed alphabetically. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $82.2 billion
Dividend yield: N/A
China's government, in an attempt to contain the coronavirus, has quickly ramped up a quarantine effort in 14 cities affecting 41 million people. It also has put several travel restrictions in place, including slapping a ban on international group tours. Meanwhile, other countries are trying to limit travel as well, such as Malaysia, which is temporarily halting visa issuing to Chinese citizens from Wuhan and around Hubei province.
Booking Holdings (BKNG, $1,962.96) – the parent of Booking.com and Priceline, among other travel sites – has understandably been hit hard.
Booking has made China, and its huge consumer base, a primary focus for growth. It has invested in leading Chinese travel sites including Trip.com (TCOM) and Meituan-Dianping to gain a foothold in this market. Booking doesn't break out China revenues specifically, but it has said that China is a major part of its International Other revenues, which accounted for 13% of revenues for the first nine months of 2019.
At the moment, its ties to China have weighed on the stock – BKNG is down more than 8% over the past couple weeks. But this may be a case of short-term pain, long-term gain.
A strengthening Chinese consumer is bolstering travel spending in the country, both domestically and internationally. China's Outbound Tourism Research Institute pegs 170% growth in the number of annual overseas trips by Chinese residents, from 149.7 million in 2018 to 400 million in 2030.
How deep BKNG and similar stock picks fall is difficult to determine because 2019-nCoV hasn't been contained – the longer the outbreak lasts and the wider its spreads, the worse it could get for Booking. For context, though, the New York Times says that Chinese stocks as a whole "caught up" with their international peers about six months after first reporting SARS to the World Health Organization.
DAL Market value: $38.0 billion
Dividend yield: 2.7%
UAL Market value: $20.7 billion
Airline stocks such as Delta Air Lines (DAL, $58.81) and United Airlines (UAL, $81.90) have delivered mostly flat stock performance over the past few years. However, they were already in value territory to begin 2020, and their stocks are getting even cheaper as travel restrictions ramp up, and as people around the globe reconsider their travel plans.
According to the Bureau of Transportation Statistics, only about 60,000 passengers flew from the U.S. to Wuhan last year. Delta and United don't even offer direct flights to Wuhan, though they do offer service via their OneWorld and Star Alliance partnerships.
That said, their ties to China more broadly, as well as Hong Kong, are significantly stronger. For instance, Stifel analysts predict that United has about 5.5% of its capacity heading along U.S-to-China/Hong Kong routes.
Both airlines have been forced to issue refunds, cancel flights and reroute people returning from China just to conduct screening measures. Their troubles likely will only get worse the longer the outbreak lasts – travel bans likely will become more restrictive, and people in general are likely to put off international and even domestic travel until the coronavirus situation has been contained.
Worry about these outcomes have already weighed on UAL and DAL, and may continue to drag their shares down. But there are reasons to like airline stocks once the coronavirus danger has passed. Lower fuel costs, rising fees and overall higher ticket prices have been improving many airlines' financial situations.
Analysts are more bullish than bearish about both United and Delta, too. Bernstein analyst David Vernon, for one, predicts that the coronavirus will only affect United's earnings by 8 cents per share, writing that it will be "less severe" on load factors than SARS. Delta, which has less exposure to China than United, should feel an even smaller impact.
Market value: $252.9 billion
Dividend yield: 1.3%
Disney (DIS, $140.08) beat the market by more than 3 percentage points in 2019 on the strength of its Marvel and Star Wars franchises, as well as the launch of its streaming service, Disney+. But while investors fawned over Disney's big-screen success, the House of Mouse also was scoring gains in the theme-park business. "Parks, Experiences and Products" revenues grew 6% year-over-year in its fiscal year ended September 2019, and operating income improved by 11%.
However, thanks to travel bans enacted by the Chinese government, Disney has been forced to close its Shanghai Disney Resort and Hong Kong Disneyland. Worse, it hasn't listed a reopening date. Worse still, this is coming during the critical Lunar New Year travel season. And on top of all that, its Chinese operations had been hurting already. Disney CFO Christine McCarthy mentioned during the fourth-quarter earnings release that the Hong Kong protests "have led to a significant decrease in tourism from China and other parts of Asia" and that the company expected a $275 million full-year revenue decline in those operations.
That was before the outbreak.
Again, however, Disney's other arms are running smoothly. Its new Disney+ service is racking up new subscribers. Rosenblatt Securities analyst Bernie McTernan writes that he expects Disney to report 25 million subscribers for its streaming service, versus a previous 21 million estimate. And Bank of America's analysts think Disney's internal estimates for Disney+ are too conservative. While domestic theme-park attendance might take a short hit from coronavirus fears, that too had been surging.
Market value: $229.4 billion
Dividend yield: 1.1%
The rise of the Chinese consumer isn't boosting only normal goods – it's quickly becoming a shopper's paradise for luxury products. Data from consultancy Bain & Company shows that Chinese shoppers account for 35% of all global luxury goods sales. Moreover, rising Chinese demand for high-end handbags, jewelry, shoes and other goods accounts for more than 90% of the growth in the luxury market. Those sales happen not just in mainland China and Hong Kong, but also on trips to Europe and major U.S. cities.
This trend has been a boon for luxury powerhouse LVMH (LVMUY, $91.19), whose brands include Louis Vuitton, Christian Dior, Moët and Hennessy. Its revenues have grown by 11% annually over the past four years, and Asia ex-Japan sales accounted for roughly a third of 2018's total.
LVMUY shares have been hit hard, off almost 9% in just more than a week amid worries about the economic impact of the coronavirus.
Here again, though, the longer-term outlook is still rosy. The firm continues to strengthen its portfolio of brands, most recently with its $16.2 billion purchase of Tiffany's, which is expected to add more than $4.4 billion in annual revenues – the bulk of that from North America. And a return to normalcy likely will include a return to Chinese luxury spending in many of LVMH's premier brands.
Market value: $26.5 billion
Dividend yield: 2.5%
Despite the "Caribbean" connection, Royal Caribbean (RCL, $126.51) is plenty exposed to China. RCL has built up its brand in the country over the past decade, and now offers several cruises throughout the region. The resulting brand familiarity has spurred Chinese travelers to also book Royal Caribbean cruises in other parts of the world. The company said Chinese guests with non-China itineraries spiked 75% between 2016 and 2019.
RCL is feeling the bite now, though. The company had to cancel a Shanghai-to-Japan sail, and it will turn away passengers either from Wuhan or who have recently traveled through the city.
Shares have dropped by double digits over the past couple weeks, in part because while investors assume the 2019-nCoV outbreak will take a financial toll, there's little visibility into just how much.
But like these other stock picks, RCL's short-term plunge could be a buying opportunity. For Royal Caribbean, its brand is its pull. Cruises tend to rely heavily on brand loyalty; their booking perks keep consumers entrenched in a single cruise line. And RCL has a strong grip on the Chinese market.
"It's a long-term strategic program, but our focus on developing the market has exceeded our expectations in terms of performance," Richard Fain, chairman and CEO, told Cruise Industry News in October. "Our sales in China are holding up well despite any economic concerns."
Market value: $14.5 billion
Dividend yield: 3.0%
Wynn Resorts (WYNN, $134.75) will strike a chord with American consumers for its Las Vegas properties, but the company is very much a China play.
As one of the only places in China that gambling is legal, the special district of Macau has become a travel mecca for entertainment seekers – and Wynn was one of the first groups to be granted an operating license in the region. Today, Wynn pulls almost three-quarters of its adjusted property EBITDA (earnings before interest, taxes, depreciation and amortization) from the region – the highest among the major competitors there.
The problem for investors looking to history is that Wynn's presence in Macau began after the 2002-03 SARA breakout, so there's little to compare it to. However, Jefferies analyst David Katz says a worst-case scenario for WYNN would see a roughly 29% decline from its Jan. 20 closing price – and shares have already dropped 17% since then.
The long-term upside for Wynn isn't in VIPs, but the so-called "mass-market gambler." Wynn has shifted its product mix in Macau to court the average Joe, and it's working. VIPs often demand opulent perks, cutting into their margins, but Wynn is finding that it can squeeze plenty of profit out of regular players. Thus, the company is executing several projects, including converting some luxury rooms into standards, to capture more of this market share.
The quick drop in WYNN shares has also brought its yield to around 3%, which is on the high end of its range for the past few years.
Market value: $16.6 billion
Pure-play Chinese domestic-consumption stocks have taken a beating. The Global X MSCI China Consumer Discretionary ETF (CHIQ), for instance, has dropped by double digits in just the past week.
Yum! China (YUMC, $44.25) is in the same boat, dropping 16% in five days.
With more than 8,750 restaurants in over 1,300 cities, Yum! China has been among the better stock picks leveraging the domestic Chinese economy and offered up torrid growth – both when it was part of Yum! Brands (YUM) as well as following its 2015 spinoff. Yum! China is responsible for Pizza Hut, KFC and Taco Bell operations in China.
But when Chinese consumers won't – or can't – spend any money, YUMC naturally will find itself in a difficult situation.
Already, Yum! China has temporarily closed some of its KFC and Pizza Hut stores in Wuhan due to the outbreak. It's a tiny fraction of its base; the real fear is that overall traffic will decline throughout the company as fewer people venture out over virus fears.
YUMC shares could sustain even more losses the longer the coronavirus outbreak drags out. But a rebound seems likely given its longer-term growth drivers, such as coffee concept COFFii & JOY and its controlling interest in hot-pot chain Huang Ji Huang. And as China continues to modernize, Yum! China plans to expand its empire into more cities, targeting 20,000 potential locations in its network. In future, you might not be able to go anywhere within the country without running into a KFC or Pizza Hut – and that would be music to investors' ears.