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How Xerox (XRX) Will Survive the Brexit Carnage (revised)

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As global equity markets went in a tizzy with the U.K’s shocking decision to exit the European Union or Brexit, various U.S. companies from diverse sectors also felt the ripple effect. Although the Brexit referendum is not legally binding and offers a likely two-year window for the entire process to be completed, it has certainly created a wave of uncertainty among investors.

Exposure of U.S. Firms in the U.K.

Several U.S companies have a lot of exposure to the U.K. market, which they use as a base to reach out to the larger continent. These companies mostly prefer the 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.  

The companies in the benchmark S&P 500 index draw average revenue of 2.9% from the U.K. Some top firms in the list include the transportation services firm Penske Automotive Group, Inc. (PAG - Free Report) , which generate 33.4% from the U.K., automobile major Ford Motor Co. (F - Free Report) with 18.8% and e-commerce retailer eBay Inc. (EBAY - Free Report) with 16.3%. 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 has led to a freefall in pound to its lowest level against the dollar since 1985 at around $1.3407.

Impact on Xerox

According to research firm Factset, the sectors that are expected to be the biggest casualties based on their revenue exposure to the U.K., are energy, information technology and materials with respective exposures of 6.4%, 4% and 3.7%.

With 5% of the total revenue coming from the U.K., information technology services provider Xerox Corporation (XRX - Free Report) is expected to be a high-profile victim of the Brexit fallout. Xerox has a significant number of manufacturing and engineering facilities in the U.K. The company has also high pension obligations in the U.K. Pension Plan for salaried employees.

The revamped market dynamics are expected to affect many U.S. firms like Xerox that import or export from the U.K. They are likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.

Adding to the Woes

Xerox has been grappling with slow demand in its printing business for years, while its attempts to leverage the business process outsourcing market also failed to lend growth momentum. The company also endured a number of slip-ups in its Medicare and Medicare information services for several government agencies across the U.S.

In 2015, the company conducted a review of structural options for its portfolio and capital allocation. On the basis of this review, the company decided to split into two independent, publicly traded entities in the first quarter of 2016. The process is expected to be completed by the end of 2016. The separation will see Xerox segregating its hardware operations and its services business. While one would comprise Document Technology and Document Outsourcing businesses, the other its Business Process Outsourcing (BPO) business. Both these entities would likely feature among the Fortune 500 companies and will be leaders in their respective markets.

With a strategic focus on various markets, Xerox expects to capitalize on the unique strengths of its Document Technology and BPO businesses and capture the value-creation opportunities post split. As part of the restructuring, Xerox has decided to execute a three-year strategic transformation program to improve its productivity and reduce costs across the businesses.

Amid such a scenario, when the company is in a fluid state and is actively restructuring its operations, the Brexit is likely to cause an additional burden on the exchequer. Only time can tell whether this Zacks Rank #3 (Hold) stock can survive this carnage or not.

(We are reissuing this article to correct a mistake. The original article, issued earlier today, should no longer be relied upon.)

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