In a historic and surprising manner, the British people voted to leave the European Union late last week. Global markets have reacted negatively to the news with financials and oil taking the brunt of the beating while gold has made significant gains. The biggest force driving this volatility is the uncertainty surrounding Britain and Europe’s future. Many of the agreements will need to be renegotiated in a way that doesn’t send Britain into recession but also doesn’t push the disintegration of the European Union. Unfortunately, the story isn’t confined to just Europe. Here in the U.S. we have also felt the effect of this historic decision. In fact, many American multinationals generate a large portion of its revenue from the United Kingdom. They include eBay Inc (NASDAQ:EBAY), JPMorgan Chase & Co (NYSE:JPM), Ford Motor Company (NYSE:F), Gap Inc (NYSE:GPS), and Xerox (NYSE:XRX) . With earnings season on the horizon these companies will likely see heavy downward revisions and weaker future earnings.
eBay
Information Technology – Internet Software & Services
eBay has had trouble regaining its footing after parting ways with Paypal almost 2 years ago. The business of an online auction house is falling by the wayside for more reliable ecommerce platforms like Amazon (NASDAQ:AMZN). Ebay has taken notice and is slowly abandoning its core business in favor of more “buy it now” options. Given its current struggles to gain traction in the ever changing consumer environment, the Brexit won’t do them any favors. Last quarter eBay pointed to strong performance in Germany and United Kingdom as a primary driver of revenue growth. With the Pound and Euro in a freefall over the past few days this should add to eBay’s woes. And despite reporting a beat last quarter, earnings dropped nearly 40% while sales fell over 50%. The upcoming quarter should be just as bad with the Estimize community looking for a 44% decline on the bottom line and 51% on the top. Shares are down 18% since the start the year and have dropped nearly 10% since the Brexit results.
JPMorgan Chase (NYSE:JPM)
Financials – Diversified Financial Services
JPMorgan is the biggest of the retail banks in terms of assets under management. Its large assets base and robust balance sheet have left the company vulnerable in the event of another crisis. The company came under intense scrutiny in April after failing to pass the living will standards which are set so that the government will never have to bail out banks again. JPMorgan was one of 5 big banks that would not have access to enough capital in the event of a new crisis. If the Brexit materializes into anything more severe, as many experts suspect it will, then the big banks will be in trouble. Already we have seen fall out from the world’s largest financial institutions which could very well continue given low interest rates and increasing currency headwinds.
Regardless, JPM has exceeded earnings expectations in 4 of the last 5 quarters and is typically viewed as one of the better performing financial institutions. Last quarter, the company featured increases in consumer banking and asset management sectors. Net interest income increased as well, despite rates staying close to zero during the period. However, significant declines were seen in commercial and investment banking sectors. Overall net income and revenue were down on a yearly basis with a high likelihood of continuing through the remainder of fiscal 2016. The Estimize community is just as pessimistic on Chase’s growth prospects in Q2. The consensus data is looking for earnings per share of $1.42 on $23.76 billion, an 8% decline on the bottom line and 3% on the top.
Ford Motor (NYSE:F)
Consumer Discretionary – Automobiles
Ford Motors is perhaps the most iconic automaker in American history. It was started by Henry Ford on the premise that the assembly line could create an affordable car for consumers. The concept not only revolutionized the automobile industry but influenced significant changes in all of manufacturing. It hasn’t been all smooth sailing for Ford, though, and after the bailout in 2008 it took the company nearly 7 years to bounce back. Last year was one of the best in recent history as Ford reported double digit bottom line gains and high single digit revenue growth in each quarter. Unfortunately its gains might be short lived. Amongst the American automakers, Ford has the biggest presence in the United Kingdom and will be hit the hardest from the Brexit. The stock is down 10% since the announcement and if forward guidance indicates this is a bigger problem shares could tumble further. Ford, along with Ebay and Xerox, are amongst the most vulnerable companies when it comes to the Brexit decision. This quarter, the Estimize consensus is calling for earnings per share of 62 cents on $36.81 billion , 26% higher on the bottom line and a 1% decline on the top. Ford stock, like GM, has struggled to make gains despite a recent surge in earnings.
Gap Inc (NYSE:GPS)
Consumer Discretionary – Speciality Retail
Weak consumer spending for apparel and accessories has been a consistent trend that has impacting certain retailers, the Gap included. Prior to its Q1 report, management warned that earnings would significantly miss expectations and by no surprise, they did. Earnings of 32 cents per share fell short of the Estimize consensus data by 12 cents, recording a drop of 41% from a year earlier. Weaker traffic and higher levels of inventory put pressure on the bottom line. This marked the fifth consecutive quarter that both earnings and revenue declined. The Gap’s core brands have all struggled in this time period, with Banana Republic stores faring the worst. Competitive pressures and the emergence of fast fashion have also played a role in Gap’s dwindling growth. Europe is currently a small portion of the Gap’s net sales, constituting only 5% of total revenues. If Brexit sends the Euro and pound falling even even further, and Asian countries feel compelled to devalue their currencies, then Gap could see problems with the 30% of total revenues those regions tend to account for. The Estimize community is already predicting another weak quarter. The consensus is calling for earning per share of 46 cents on $3.69 billion in revenue. Profits are expected to contract 25% on a year over year basis with revenue down 4% over the same time frame. Per share estimates have been cut 22% sinces its last report, reflecting analysts negative sentiment towards the company.
Xerox Corporation (NYSE:XRX)
Information Technology – Office Electronics
Xerox has had a rough 2016 so far. Earlier this year the company announced its intent to split into 2 publicly traded companies to become leaner and more efficient. The first company will focus on its core document services and other will primarily deal with its business processes and consulting services. Around the same time Carl Icahn took a stake in the company, placing himself on the board with the intent to push a new strategy. The stock has not reacted well to that news and is down 15% since the start of the year. With the news of Brexit, shares have dropped 10% with a high probability of falling further. Xerox is one of the high profile losers from the Brexit fallout. The company generates about 5% of its total revenue from the U.K., which doesn’t sound like much, but with slowing demand in the printer business lately, Xerox can’t afford anymore problems. Major foreign currencies currently comprise 24% of its total consolidated revenue and they way things are going, this portion of Xerox’s business should be largely impacted.
How do you think these names will report this week?