The argument over whether Brexit will be a boon or drag on the UK economy in the long term will go on, but in the short-term, no matter which side of the divide you’re on, there’s little doubt that UK equity markets would fall sharply in the event of the UK crashing out with no post-Brexit deal in place.
However, as we saw in the immediate aftermath of the initial Brexit vote in 2016, not all stocks will be dinged equally, with the potential for companies with a high proportion of non-sterling sales to actually benefit.
New name, same successful business model
I would certainly expect this to be the case for plumbing supplies distributor Ferguson (LSE: FERG). This is because the FTSE 100 constituent may be listed in the UK, but its business here is quite small. In the nine months to April, the UK accounted for less than 6% of profits due to the company’s focus on the massive US market. If the pound were to once again weaken dramatically against the dollar, we’d see a solid uplift in Ferguson’s share price.
And over the long-term, no matter how Brexit negotiations go, Ferguson has plenty going for it. First and foremost is its exposure to the US market, where sales in the first three quarters of the year increased 10.9% in constant currency terms to $12bn. A strong focus on cost management and improvements to operations from recurring bolt-on acquisitions meant margins grew also, sending US constant currency trading profits, which are essentially adjusted operating profits, up 17.5% to $0.9bn.
While its small UK business continues to struggle, this exposure to the US and fast-growing and more profitable operations in Canada and Central Europe offer plenty of potential for further organic and inorganic expansion. However, with the company valued at 18.6 times forward earnings I’ll be waiting for a dip in its share price before I’d consider buying into what is a highly cyclical business at heart.
A new constituent with staying power
Another FTSE 100 giant that would fare well following a no deal Brexit is safety products engineer Halma (LSE: HLMA). Last year, only 16% of group revenue came from the UK and this figure should fall over time as management focuses on faster growing regions outside of the US, UK and Europe.
Like Ferguson, there’s plenty to like about Halma aside from its high degree of non-sterling earnings. Last year was its 15th straight year of increased revenue and profits, which shows just how successful the company’s expansion strategy has been thanks to organic expansion into new markets and regions, recurring bolt-on acquisitions in new sectors, and investments in developing new products.
In the year to March, all of these long-term growth drivers came together to send group revenue up 12% to £1.1bn with pre-tax profits clocking in 10% higher at £0.2m. Looking ahead, I see no reason for this growth to stop any time soon as increasing regulation and population growth provide significant tailwinds.
Plus, with a highly profitable business model and period-end net debt of only £0.2bn, the company is in a great position to gain market share for many years to come. With a valuation of 29 times forward earnings, Halma is quite pricey, but for long-term investors and those worried about a hard Brexit, it could be a high-quality addition to many portfolios.