Should you avoid this stock after Brexit causes a 10% fall in UK revenues?

Recruitment company Hays (LSE: HAS) has reported a somewhat mixed picture for the quarter ended 30 September. While its international business is performing well, revenue in the UK has fallen by 10%. Does this mean you should avoid investing in Hays?

The disappointing performance felt in the UK was caused by a marked slowdown in permanent job activity in the aftermath of the EU referendum. In fact, Hays felt a step down in permanent job activity immediately following the shock vote result, although it has now picked up. But despite understandable company nervousness about taking on permanent staff, temporary job activity in the UK remained stable throughout the quarter.

Looking ahead, it would be unsurprising for Brexit to cause more problems for Hays in the UK. Article 50 of the Lisbon Treaty hasn’t yet been invoked and once it is, negotiations and the potential for greater uncertainty will begin. This could mean further declines in Hays’ UK sales over the short-to-medium term.

However, Hays is an international business that’s capable of absorbing such challenges. In the previous quarter, its revenue increased by 17% (3% on a like-for-like basis) as its operations in Asia Pacific and Continental Europe/Rest of World delivered revenue increases of 30% and 33% respectively. And with its international operations now representing a dominant 73% of its total revenue, Hays is well-placed to overcome the challenges faced by the UK as Brexit becomes a reality.

Ups and downs

Looking ahead, Hays is forecast to record a fall in earnings of 2% in the current year. Clearly, this is disappointing, but it reflects the challenges in the global economic outlook that are affecting other recruitment companies in general. For example, Pagegroup (LSE: PAGE) is expected to deliver a rise in its earnings of 2% this year, followed by a fall of 5% next year.

Despite the disappointing outlooks, both companies trade on relatively high valuations. For example, Hays has a price-to-earnings (P/E) ratio of 16.6, while Pagegroup’s P/E ratio is even higher at 17.6. Both of these figures could come under pressure as their disappointing forecasts filter through.

Furthermore, the outlook for the global economy is highly uncertain. Brexit could lead to challenges in the Eurozone and also means reduced confidence in the global economic outlook. The Federal Reserve is likely to raise interest rates in the next few months and while this may not choke off the US economic recovery, it could cause investors to demand wider margins of safety before buying cyclical shares such as Hays and Pagegroup.

As such, both companies lack investment appeal right now. They may perform well in the long run and both have sound strategies to grow their earnings over the coming years. However, in the short run their share prices could fall due to high valuations given their expected falls in profitability.

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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.