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Brexit makes me bearish on Carpetright plc and Balfour Beatty plc

Image: Carpetright: Fair use

The outlook for the UK economy is highly uncertain. Brexit is likely to be a dominant force next year as negotiations between the UK and EU begin. This is set to cause difficulties for UK consumers and for UK businesses alike. Doubts about the terms of the deal between are likely to cause reduced investment, while weak sterling is already pushing inflation higher. This could equate to difficult operating conditions for UK-focused companies over the medium term.

Challenging operating conditions

Evidence of the effects of Brexit can already be seen in the performance of consumer goods companies such as Carpetright (LSE: CPR). It has today reported a decline in revenue of 3.8% and a reduction in pre-tax profit. It declined from £7.1m in the first half of 2015 to £4.1m in the same period of the current year.

The company has suffered from uneven consumer demand following the EU referendum. Like-for-like (LFL) sales in the UK declined by 2.9% due in part to an increasingly competitive market. Currency movements also caused a negative impact on performance and with sterling likely to weaken further, the future for margins is somewhat challenging. Meanwhile, Carpetright’s performance in the rest of Europe was also disappointing, with LFL sales falling by 1.5%.

A challenging future

Carpetright is likely to endure further problems in 2017. As mentioned, sterling could weaken further and disposable incomes may come under pressure. Higher inflation will mean that consumers have less to spend than they did in 2016 in real terms, which could mean they delay the purchase of relatively expensive items not immediately needed.

Also facing a difficult outlook is construction company Balfour Beatty (LSE: BBY). It reported today that the first phase of its transformation programme is nearing completion and has put the business on an improved long-term financial footing. It expects to have a positive net cash balance by the end of the year and management of legacy issues is proceeding in line with the company’s timetable.

However, Balfour Beatty faces difficulties associated with Brexit. The awarding of contracts may be delayed as the government and businesses decide to postpone capital investment until the UK’s future is more certain. And with there being uncertainty surrounding the availability of EU workers in the UK, it may prove more difficult to obtain the necessary skilled labour force in 2017 and beyond. This may cause higher costs for Balfour Beatty as well as project delays.

Worth waiting for?

Due to their difficult outlooks, it may be prudent to avoid Balfour Beatty and Carpetright at the present time. While both companies are making progress with their strategies and have sound balance sheets, their financial performance in 2017 could suffer due to uncertainty surrounding Brexit. In the long run they both could perform well, but lower prices could be on offer for the two stocks for patient investors over the coming months.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.