Following the EU referendum, the outlook for the UK economy is vastly more uncertain. House prices are predicted to fall, unemployment to rise and consumer spending may come under pressure. All of this is bad news for UK-focused stocks such as BT (LSE: BT.A), with demand for its quad-play offering likely to be lower than had been forecast just a few months ago.
Of course, this doesn’t mean BT is a stock to avoid. Its strategy to diversify into quad-play (mobile, pay-TV, broadband and landline services) is a sound one and reduces its dependence on a small number of products. However, the speed of change taking place at BT is somewhat risky, with it investing billions in sports rights and in upgrading its network.
Allied to major discounts to attract new customers to generate cross-selling opportunities, this is a key reason why BT’s profit is due to fall by 10% in the current year. As such, its shares could come under pressure in the near term.
However, with BT forecast to increase its earnings by 8% next year and it trading on a price-to-earnings growth (PEG) ratio of 1.5, its medium-to-long term performance could be strong. Therefore, waiting for a keener share price in the short run could be a smart move before buying-in.
Wait and see?
Sky (LSE: SKY) is UK-focused too, but it also has exposure to Germany and Italy following its merger with Sky Deutschland and Sky Italia. Therefore, it’s perhaps less exposed to the risks of Brexit on the UK economy. As with BT, Sky has performed relatively well in winning new customers and has also been able to record impressive customer retention performance. This shows that Sky’s focus on differentiated content is working and it could lead to improved profitability over the medium-to-long term.
However, Sky is forecast to report a fall in earnings of 10% in the current financial year. This could hurt investor sentiment and with Sky trading on a forward price-to-earnings (P/E) ratio of 15.6, it lacks appeal at the present time.
Long-term buy
Meanwhile, Vodafone (LSE: VOD) has a relatively wide spread of geographic exposure, although it’s still heavily reliant on the performance of the European economy. It has also expanded into new services and this helps to diversify its income stream and make it an even more reliable business.
However, Vodafone shouldn’t be viewed as a quasi-utility as its growth outlook for the next couple of years is very strong. It’s expected to increase its earnings by 36% in the current year, followed by growth of 15% next year. This could significantly improve investor sentiment in Vodafone and lead to further share price gains following the 15% rise of the last six months. As such, Vodafone appears to be a strong buy for the long term.
