The results of the recent Brexit vote threw the markets into a seesaw. Britain’s unexpected decision to exit the European Union caused the Dow Jones Industrial Average to fall 1,000 points in two trading days. Surprisingly, the market proceeded to recover its losses and then some. As of today, the S&P sits at an all-time high.
Still, a Brexit will have lasting implications for companies that conduct a significant portion of business in the United Kingdom. Many economists predict Britain will enter a recession following the Brexit vote.
If that comes true, the following three stocks may be in trouble, as these companies generate at least 20% of their revenue from the U.K.
PPL Corp. (NYSE: PPL)
PPL Corp. is a utility, and serves customers in both the U.S. and U.K., after its 2011 acquisition of a U.K. electricity distribution business for $5.6 billion. This major investment could backfire on the company, as PPL is now heavily exposed to the U.K., at an inopportune time.
Making matters more complicated is that PPL was already struggling, even before the Brexit referendum. Last year, PPL’s revenue and net profit declined 10% and 26%, respectively, and the Brexit may only worsen these problems.
PPL stock has enjoyed the rally that has boosted the utility sector as a whole. Shares have gained 20% in the past one year, and that doesn’t even include its dividend returns. In the same time, the S&P 500 is up a much more modest 2%.
Consequently, PPL’s valuation appears slightly bloated, if the U.K. economy contracts going forward. At 15 times forward earnings, PPL stock is aggressively valued for a slow-growth utility. Investors may want to wait for a better buying opportunity, given the likelihood of higher interest rates as well.
Xerox (NYSE: XRX)
Xerox stock already flashes warning signals for investors because its underlying business is in trouble. That is due to a structural shift away from Xerox’s core products like printers and fax machines. In the digital age, much more work is being done online, and as a result, demand for printing and faxing is eroding.
Because of this, the company has been stuck in a prolonged decline. Five years ago, Xerox generated $22.8 billion of revenue and $1.08 in adjusted earnings per share. Last year, Xerox generated $18 billion of revenue and $0.98 per share in earnings.
In response, Xerox is attempting to significantly restructure its business. It intends to split itself up, by separating its various business units to trade independently of one another. The company believes that these businesses, which will each trade publicly, will command a higher cumulative valuation than the singular entity currently does.
Recently, rumors have also circulated that Xerox is in talks to merge with publishing and printing company R.R. Donnelley (NYSE: RRD). But these are short-term moves; the fundamental change from printing to online services like email will only accelerate from here, and acquiring another company in the printing industry will not help much.
Xerox’s total revenue declined 4% in the first quarter, primarily because revenue fell 10% in the document technology business. The technology industry evolves rapidly, and Xerox is in danger of being left behind. The Brexit only makes Xerox’s challenges that much more significant.
Computer Sciences (NYSE: CSC)
Another company that was already struggling entering 2016 is Computer Sciences. Its revenue declined 13% last year, which is a bad sign, because a recession in the U.K. would only make matters worse, because the U.K. is one of the geographic regions doing well for the company.
Computer Sciences noted on its fourth-quarter conference call that the U.K. was one of its best-performing regions in terms of fourth-quarter bookings. This indicates strong demand for Computer Sciences in Europe, but the Brexit could undo the company’s recent momentum. Management had forecast low-single digit revenue growth in fiscal 2017, but the company’s ability to meet this guidance is now in question.
These investments are owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%.