With the U.K’s shocking decision to exit the European Union or Brexit, equity markets across the globe witnessed a dreaded bloodbath. As the news spread like wildfire and resonated across the markets, significant shareholders' wealth eroded on Friday. A wave of uncertainty forced investors to flee to safe havens like government debt and gold.
Various U.S. companies from diverse sectors with considerable exposure to the U.K. market also felt the ripple effect. These companies mostly prefer U.K. cities like London and Birmingham to Paris, Frankfurt, Berlin, Amsterdam and others for establishing a European footprint. About one-third of the sales of these firms in the European continent are reportedly eked out through their British counterparts, which usually tend to be their regional headquarters.
On a broader perspective, the companies on the benchmark S&P 500 index draw average revenue of 2.9% from the U.K. For these companies, operating costs are likely to escalate as they restructure their resources to maintain access to both the European Union and Britain. Currency conversion will likely add to the woes as the news led to a freefall in pound to its lowest level against the dollar since 1985 at around $1.3407.
GE Remains Focused
The U.S. Industrials sector declined over 4% on Friday as concerns over Brexit lingered in the equity markets. Export-oriented Industrials are likely to face significant headwinds with a stronger dollar. This is particularly true for General Electric Company GE that has 22,000 employees in the U.K. and over 100,000 employees in Europe. According to a stress report by analysts of financial services holding firm Stifel Financial Corp. SF, about 1.5% of the $108.8 billion revenues expected in 2016 could be at risk following the Brexit referendum.
General Electric shares fell 4.4% to $29.82 on Friday, Jun 24, 2016 following the news. However, Jeffrey R. Immelt, the Chairman and CEO of the company, reiterated that it would continue to focus on the digital transformation of the continent including the U.K. to explore growth opportunities in the region (read more: GE Expands Industrial Internet for Digital Growth in Europe).
UTX Allays Fears & Reaffirms Guidance
With over 8,000 employees, United Technologies Corporation UTX has a considerable presence in the U.K, registering approximately $2 billion in revenues from the region in 2015 out of the overall tally of $56.1 billion. The Brexit news led to a 3.4% decline in share prices to $98.99 at the close of trading hours on Friday. However, the company allayed fears of investors regarding any impact from the Brexit on its future performance and reiterated its guidance for 2016 for adjusted EPS of $6.30 to $6.60 on sales of $56 billion to $58 billion and organic sales growth of 1–3%.
Gregory Hayes, the President and CEO of the company remarked, "We are hopeful that the separation process will be carried out in a manner that minimizes disruption and economic impact. We believe that the current benefits of a free and open trading zone will largely remain at the conclusion of this process. As a globally diversified company, we are well equipped to manage these types of uncertainties."
Honeywell Gets Bruised
With over 7,000 employees, the U.K. is one of the largest markets for Honeywell International Inc. HON in Europe and remains an integral part of its plans for future growth in the region. In the U.K., the company has businesses in all the three reportable segments of Aerospace, Automation and Control Solutions and Performance Materials and Technologies.
In 2015, Honeywell had generated $8,674 million in revenues in Europe out of an overall tally of $38,581 million, a sizable portion of which was registered in the U.K. Non-U.S. manufactured products and services, mainly in Europe and Asia, were 39% of total sales in 2015. With such an exposure, no wonder the shares took a beating on Friday to close at $112.98, down 3.7%.
3M Remains Vulnerable
The U.K. serves as one of the largest markets for 3M Company MMM outside the U.S. with 2,600 employees across 20 locations including 9 manufacturing sites. In 2015, the company recorded 20.5% or $6,228 million from Europe, the Middle East & Africa, a significant amount of which was generated in the U.K. The products that are manufactured in the country includes coated abrasives, personal safety equipment, adhesive tapes, industrial microbiology products, drug delivery systems, high performance coatings and imaging systems.
With such a prominent exposure and presence in the U.K., the company remains vulnerable to risks related to Brexit. The shares of the company declined 2.9% on Friday to $169.12 as an aftermath of the Brexit referendum.
End Note
Analysts at the Dutch bank ING perfectly summed it up, “While not every sector is as vulnerable to a British demand shock, manufacturing in general and air transport would definitely take a hit. Moreover, a Brexit could actually reroute investments to continental Europe, either through repatriations or new investments from non-EU countries which took the UK as an entrance point to the European Single Market.” Although the Industrial sector in the U.S. is likely to take some short-term beatings owing to Brexit, it is likely to devise newer strategies to counter muted growth and related risks over the long term.
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