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Potential Brexit Costs being Faced yup by S&P 500 Companies

Potential Brexit Costs being Faced yup by S&P 500 Companies
U.S. companies are broadly conceding that the so-called "Brexit" could weigh on profits as they face investors in their first earnings reporting season since Great Britain voted to leave the European Union.
Though it is too soon to tell how deep it may be or when it will come, a hit is expected, says companies from General Motors to Yum Brands to FedEx.
Independent analysts have suggested that Brexit could cost U.S. companies billions of dollars in earnings due both to currency factors and also to lost sales in Europe even as Wall Street investors were originally rattled by the Brexit vote. Brexit has been a topic of discussions in quarterly conference calls for roughly 38 of 63 S&P 500 companies since the end of June.
To offset up to $400 million of potential headwinds triggered by Brexit, GM has said it was considering cost cuts in Europe.
"The result of the vote has adversely impacted the British pound and the uncertainty has put a strain on the UK automotive industry," Chuck Stevens, executive vice president and chief financial officer told investors.
As a result of the drop in the pound and increased economic uncertainty caused by Brexit, Delta Air Lines said last week it would reduce capacity on its U.S.-U.K. routes.
Reduction in the demand for its services as well as creating new trade regulations could be the result of a global economic downturn due to Brexit, FedEx Corp has said in its annual report filed July 17. A potential negative currency effect was also cited by consumer products company Helen of Troy.
According to S&P Dow Jones Indices, with just 1.9 percent of revenue flowing from Britain, S&P 500 corporations overall depend on Europe for 8 percent of their revenue.
With Britain not expected to even begin the exit process before the end of 2016 and as Britain's separation from the world's largest trade bloc unfolds over years, companies that don't see Brexit hurting their results now may change their tune in the future.
Leaving the EU could create global financial instability and an economic slump in Europe, economists had widely warned ahead of the June 23 vote.
A rise in the U.S. dollar against major currencies and an immediate selloff of global and U.S. stocks was the result of the vote. The rise of the dollar could hurt U.S. exporters if sustained. The negative economic effects of Brexit will occur over years instead of months, many now emphasize.
"My guess is that companies are sensing the same thing, and don't know how to quantify it yet," said Steve Chiavarone, portfolio manager at Federal Investors.
According to a report released this week by FiREapps, some $35 billion to $40 billion over coming quarters in currency impacts alone could be the cost for North American and European companies due to Brexit.
However some companies feel that a Brexit effect still could do well. Its bottom line could be hit by about $50 million over the rest of the year, expects Yum Brands, due to Brexit-related currency charges. Despite this, based on signs its China business was strengthening, the shares of Yum, which operates restaurants including Taco Bell, still surged. GM raised its overall outlook for the rest of the year even after announcing its potential cost cuts. While Halliburton  said it doesn't see Brexit having a dramatic effect, IBM said this week that it expects no effect from Brexit on its results for this year.

Christopher J. Mitchell

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