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Cooling China worries some multinationals

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Slowing growth in China is emerging as a concern in some of this quarter's earnings reports from U.S. multinationals that have long relied on strong growth in China and other emerging markets to drive their profits.

Though China's economic growth is still well above that in other economies, its efforts to cool that growth -- for example, by restricting credit -- are now translating into weaker sales at some U.S. companies that do business there.

The trend is not yet widespread and companies are quick to stress the many advantages of China's market, but the commentary this earnings season has taken a more cautious tone than in the past.

3M Co's Asia-Pacific sales rose 3 percent in the latest quarter, weaker than in recent results, reflecting softer demand in China.

"The Chinese government successfully slowed activity to stem inflation," 3M Chief George Buckley said on a conference call with analysts. "Our China team anticipate continued below trend growth in the first half of 2012."

3M (MMM-N) profit beat Wall Street forecasts. The maker of Post-It notes, Scotch tape and components for consumer electronics reported net earnings of $954 million US, or $1.35 per share, compared with $928 million, or $1.28 per share, a year earlier.

Analysts on average were expecting a profit of $1.31 a share, according to Thomson Reuters I/B/E/S.

A weak spot was the company's display and graphics segment, hurt by what 3M called "deteriorating" demand for consumer electronics. The business showed its largest sales declines in Asia Pacific.

Another global manufacturer, Eaton Corp. (ETN-N), explicitly singled out China as one of several factors behind its sales miss.

Eaton Corp., a maker of electrical control systems and auto and truck components, reported a disappointing quarterly profit on Thursday, saying U.S. customers delayed major projects, Europe's economies hurt sales, and tight credit damped China sales of electrical equipment.

"In Asia Pacific, the shortfall was due to a slowdown in China as a result of restrictions on credit availability," Chief Executive Sandy Cutler said on Thursday.

Eaton's net income rose to $362 million, or $1.07 per share, from $280 million, or 82 cents per share, a year earlier. That was below the analysts' average estimate of $1.11 a share, according to Thomson Reuters I/B/E/S.

Sales rose 10 percent to $4.03 billion, below Wall Street estimates of $4.16 billion.

Eaton shares were down 2.8 percent in early trading at $48.15. 3M was up 1.2 percent to $87.50.

SINGLE-DIGIT GDP GROWTH

"A lot of the growth prospects for these companies overseas have been (dependent) on what happens in China," said Catherine Avery, president and CEO of CAIM LLC, which holds Eaton shares as well as Illinois Tools Works and Emerson Electric, which have not yet reported results.

"If they do slow, it's going to be an issue," she said, adding that economic growth of 8 percent, though down from 11 percent, is still pretty good compared to the rest of the world.

China, like the United States, is affected by Europe's debt problems and slowing euro zone economies, Avery said, so until investors get clarity on how Europe resolves its issues, long-term corporate forecasts need to be taken with a grain of salt. Many companies are rightly sticking to very broad 2012 forecasts.

To be sure, any China slowdown may well be short-lasting. 3M's Chief Operating Officer, Inge Thulin, said faster growth in China would return later in the year.

"Whatever challenges (emerging markets) present today pale in comparison to the opportunities," he told analysts.

Likewise, Caterpillar Inc. (CAT-N), whose earnings blew away expectations, noted China has already restarted policies to support growth, and said it expects further easing is likely. It estimated China's economy will grow 8.5 percent in 2012, "sufficient for growth in construction and increased commodity demand."

The world's largest heavy machinery maker said net income for the fourth quarter was $1.55 billion, or $2.32 per share, compared with $968 million, or $1.47 per share, a year ago. That result was 59 cents above the analysts' average estimate of $1.73 a share, according to Thomson Reuters I/B/E/S.

Sales rose 35 percent to $17.24 billion, above Wall Street estimates of $16.05 billion.

ELEVATORS, FRIDGES, FRIED CHICKEN

Signs of a China slowdown cropped up in the results of two other multinational companies this week, and affected investor sentiment toward a third.

At United Technologies Corp (UTX-N), which reported results on Wednesday, slowing Chinese elevator orders were a factor in weaker-than-expected revenue growth.

TE Connectivity (TEL-N) reported disappointing results. The Electronic connector maker's communications and industrial solutions business reported lower sales both year-over-year and sequentially. Within that business, appliance sales fell amid weak new home construction and fewer government incentives in China, the company said.

Meanwhile option investors appear to have worries about Yum Brands Inc. (YUM-N), taking out protection against a share price decline ahead of the fast-food chain's report next month.

Prospects of slowing Chinese growth and unfavorable exchange rates, the same headwinds that threaten rival McDonald's Corp. (MCD-N), are worrying investors, analysts say. China is Yum's top market for revenue and profit and the company's KFC chain is the top Western restaurant brand there.

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