New developments in the UK’s messy divorce with the European Union aren’t expected to weigh on UK-exposed stocks as company-specific issues eclipse the Brexit drama.
For companies that take in a significant portion of their revenue from the UK, the drawn out Brexit saga has taken a backseat to other issues despite parliament disarray and an impending Brexit vote that could leave the UK crashing out of the EU with no deal, according to analysts.
“Brexit is a factor, but down on the list,” said Darrin Peller, managing director and senior analyst at Wolfe Research.
DXC Technology, an IT services company, has a 15% revenue exposure to the UK, according to a recent report by Wolfe Research. However its losses this year — down approximately 43% in 2019 — are largely due to internal struggles the company is facing such as a recent CEO shake-up and disappointing earnings reports.
Stocks in the IT services sector with UK-exposure such as DXC Technology could begin to feel more pressure if Brexit consequences were to result in a slump in consumer and business spending.
“That is a big unknown and that certainly would impact pricing,” said Bryan Bergin, analyst for Cowen.
Despite its 11% exposure to the UK, investors are still betting on fintech company, PayPal which is up about 24% in 2019, slightly outperforming the S&P 500.
“We are buy-rated on PayPal and very bullish,” said Lisa Ellis a partner at MoffettNathanson.
“The magnitude of those could be more than enough to offset a mild slowdown in the UK economy,” Peller said.
Hugo Keung says PayPal’s exposure to Brexit doesn’t impact his decision to buy or sell the stock, but that the volatility of the pound — in part due to Brexit uncertainty — does.
The 25-year-old investor, who is based in the UK, bought PayPal about 17 months ago. He says that he’s waiting for a drop in the pound to coincide with a rally in his stock holdings so he can sell for higher gains. Until then, he is comfortable having PayPal in his portfolio.
“Despite increasing competition in the space, I feel PayPal [has] the first-mover advantage and that should be enough for them to remain relevant for a long long time,” he said. “The company is still showing strong growth.”
For auto supplier, LQK Corporation, UK-exposure is a non-issue, according to Michael Hoffman, analyst for Stifel, Nicolaus & Co. The company is up about 33% in 2019.
“LKQ’s exposure to this, to me, is not a point of friction,” he said. The focus is more on vendor financing programs, he says.
“That leads to changes in their relationship with their vendors such that Brexit becomes even less and less an issue.”
Analysts go on to note that some companies took a hit in the earlier iterations of Brexit when the UK voted to leave the EU in 2016 and around the originally-scheduled leave date in March. But it has become so dragged out that investors have shifted their focus away from the issue.
“There’s almost become an apathy around it,” Peller said. “We’ve already built into our models slower growth in the UK.”
Brexit uncertainties to have little effect on UK-exposed stocks, analysts say – CNBC