Last Friday’s Brexit vote shook the global markets. In a landmark referendum, Britain voted in a slim but clear majority — 51.8% to 48.2% — to leave the European Union. This was a surprise outcome, as the global markets had priced in the remain vote to win. In the two trading days following the Brexit vote, the Dow Jones Industrial Average fell 1,000 points.
In another surprising twist, the markets have largely recovered. Through June 30, the Dow Jones Industrial Average had nearly recovered all of the Brexit losses. But the Brexit vote is likely to cause tightening conditions in the financial markets, and the British currency has collapsed against the U.S. dollar. This makes goods sold in Britain by U.S. firms less competitive.
As a result, investors can prepare for this by carefully reviewing the stocks that have high levels of exposure to the United Kingdom. Molson Coors (TAP ), PPL Corp. (PPL ), Computer Sciences (CSC), Ralph Lauren (RL ), and Xerox (XRX ) all have high levels of exposure to the U.K.
Exposure to the U.K. Could Pose Problems for These Stocks
These five stocks generate at least 20% of their total revenue from the U.K., which matters a great deal to investors because if England goes into recession as a result of the Brexit vote, these companies will likely struggle with revenue declines.
Molson Coors is a beer company, with a large portfolio of brands including Coors, Coors Light, Molson Canadian, and Blue Moon. It has significant exposure to the U.K. due to its international brands such as Carling. Molson Coors’ sales decreased 2.2% in constant currency last year, but it had a lot of success in its international operations. Sales in Europe and other international markets rose 15% last year. Although this international strategy and focus on Europe would be a good idea when economic conditions are improving, if the U.K. spirals into recession, it will likely backfire.
PPL Corp. is a utility, which usually indicates a stable company. After all, everyone needs to keep the lights on, even when the economy takes a downturn. But going forward, PPL could exhibit more volatility than most investors would presumably like from a utility, because it is heavily concentrated in Europe. In 2011, PPL bought a major U.K. electricity distribution business for $5.6 billion. In hindsight, this may hold the company back if the U.K. enters a recession. PPL was already struggling—its revenue and net profit declined 10% and 26%, respectively, and the Brexit may only worsen these problems.
Computer Sciences’ revenue fell 12.5% last year, which is an ominous sign, given that the company is heavily exposed to the U.K. and that the U.K. was one of its best-performing regions in terms of fourth-quarter bookings. This indicates strong demand in Europe looking out over the next year, and management had forecast low single-digit revenue growth in fiscal 2017. But this could come undone by the Brexit vote.
Ralph Lauren is a large consumer goods company, and it operates in four main segments: apparel, home, accessories, and fragrances. The company states that its primary growth strategy is through expansion in new geographies, particularly Asia and Europe.
It has been a very difficult period for apparel, because of the emergence of Internet retail, which has weighed on sales at brick-and-mortar stores. This has presented challenges for Ralph Lauren, which is why its revenue declined 1% last year in the Americas. But revenue increased 4% in Europe, helping to lead the company through a difficult environment. Its European exposure could soon become a headache for the company, because Europe was one of the best-performing regions for Ralph Lauren last year.
Xerox is particularly in trouble from the Brexit, as the company was already facing pressure from a deterioration in its core business. Electronics such as printers and fax machines are not used nearly to the extent they used to be, and this has caused Xerox’s revenue and earnings per share to decline over the past five years. Xerox generated $22.8 billion in revenue and $1.08 per share in adjusted earnings in 2011. But last year, the company generated $18 billion in revenue and $0.98 per share in earnings.
A centerpiece of Xerox’s turnaround is that it will split itself into two separate, publicly traded entities by the end of 2016: the document technology business and the business process outsourcing business. Management believes that separating the two businesses will allow each team to more efficiently focus on their unique client needs. But breaking the company up into two pieces won’t change the core issue of the decline in printing and related equipment. Xerox’s total revenue declined 4% in the first quarter, primarily because revenue fell 10% in the document technology business.
The Bottom Line
Although the stock markets have mostly recovered Brexit losses, the economic impact of Brexit is likely to be much more long-lasting. Companies that do business in Europe, and specifically the U.K., are in danger of seeing deterioration over the coming year as Britain gets set to leave the E.U. As a result, investors may want to avoid these stocks with heavy U.K. exposure.