No other Hollywood film sums up the Brexit risk for American companies quite like Walt Disney Co.’s (NYSE:DIS) “The BFG.” Directed by Steven Spielberg, BFG — the “F” stands for friendly — was supposed to be a major sales haul for Disney Studios.
Indeed, the trailer for the fantasy film was an impressive concoction of live acting and computer-animated sequences. Even the quirky title drew intrigue. But for all its star power, BFG took in less than $20 million, a severely disappointing result.
The take-home lesson is brutally simple — yesterday’s accomplishments don’t necessarily carry over into the present. The BFG had the financial backing of Disney, and the often-imitated but rarely matched vision of Spielberg. In the end, it wasn’t enough, and Disney will be lucky to recoup the film’s budget. But BFG wasn’t alone. Several “slam dunks” didn’t pan out this year, including “Independence Day: Resurgence” and “Warcraft.”
Wall Street should take note. Films that have had success featured small budgets, like the $10 million it took to produce “The Purge: Election Year.” The campy horror series performed well considering the genre, bringing home more than three-times its production budget. Bigger, therefore, isn’t always better.
That’s especially true for American “BFG” companies in light of the Brexit fiasco. Continental European markets have bore the brunt of the U.K. voters’ decision to leave the European Union. Exchange-traded funds that track the most wealthy regional countries, such as iShares MSCI Germany Index Fund (ETF) (NYSEARCA:EWG), iShares MSCI France Index (ETF) (NYSEARCA:EWQ) and iShares MSCI Italy Index (ETF) (NYSEARCA:EWI), are all down sharply from their pre-Brexit highs.
The issue may seem quite foreign for most of us. However, the risks surrounding the Brexit is what is keeping American markets locked in a tight, consolidation pattern. For BFG companies that require BFG sales just to break even, the fact that so many European sectors are awash in red ink is a significant challenge.
Here are three American giants that might trip up on the Brexit.
At-Risk American “BFG” Stocks: Apple Inc. (AAPL)
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Judging by the commentary following Apple Inc. (NASDAQ:AAPL), any criticism of the house that Steve Jobs built is tantamount to fighting words.
Nevertheless, despite its BFG status, AAPL is not immune to the Brexit fallout. In uncharacteristic fashion, AAPL stock is down 9% year-to-date. While there are other factors besides the Brexit involved, a weakening Europe is not doing Apple any favors. This circumstance is exacerbated by the fact that AAPL is losing substantial ground in the critical Chinese retail markets.
The alarm bells are also being sounded by Citigroup analysts, who note a slide in iPhone upgrades by once rabid consumers. Any hit to iPhone sales has an exponential effect, considering that smart phones make up two-thirds of AAPL’s total revenue. That was one of the reasons why renowned activist investor Carl Icahn dumped out of his position in AAPL stock.
But with the Brexit moving from a conspiratorial fantasy to a stark reality, that decision looks even more genius in hindsight.
This is not to say that AAPL is a short candidate. Sales of iPhones could see an improvement over the next several months as many customers are multiple generations behind the current model. In addition, AAPL stock is holding onto horizontal support, frustrating bears that want to see it decisively falter. Still, it’s very conceivable that this BFG could meet some nearer-term volatility brought on by the Brexit.
With the waters still murky, the best course of action with AAPL is to wait and see.
At-Risk American “BFG” Stocks: McDonald’s Corporation (MCD)
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Just recently, iconic American BFG McDonald’s Corporation (NYSE:MCD) won an important legal battle in Europe.
Future Enterprises, a food and beverages producer from Singapore, attempted to register “MACCOFFEE” in the EU, but was rebuffed by several European courts. Unfortunately for MCD investors, that may be the only victory in Europe that the Golden Arches will have for quite some time.
MCD stock has been anemic this year, and the Brexit is just begging for further trouble.
Unlike most cases, for MCD, the Brexit is a compounding problem as opposed to a brand new one. Over the last three years, total revenue has slipped an average of nearly 5%. That compares unfavorably to a near-6% sales growth rate between 2010 through 2013.
The core issue is market saturation, a common Achilles heel for a BFG company. After having conquered the known world, where else can MCD impose its will?
Worse yet, McDonald’s has shown vulnerability to previous European fiascos. During the height of the debt crisis and austerity concerns, MCD saw a sharp reversal of fortune in its most lucrative market. Even the Russia-Ukraine conflict brought about temporary store closures.
As with AAPL, the risk to MCD stock isn’t one of total collapse. However, with the Brexit already negatively impacting major European indices, it’s a fairly safe bet that the company will experience volatility for the remainder of the year.
MCD stock won’t be on the dollar menu any time soon, but patient investors may get to see a nice discount further down the line.
At-Risk American “BFG” Stocks: The Coca-Cola Co (KO)
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Among American BFG companies, perhaps none is more ubiquitous than The Coca-Cola Co. (NYSE:KO).
Their cheap and addictive cola products can be found in every corner of the world. But this dominance comes at a steep price.
With the Brexit rearing its ugly head, the bearish sales trend for KO stock will only get worse. Going a step further, it wouldn’t come as a surprise if KO became the most affected BFG company in the wake of the Brexit.
Just a week prior to the U.K. referendum, KO downgraded its sales and operating income targets for the second quarter. A merger between Coca-Cola Enterprises and two KO bottlers in Europe is expected to pressure results.
Incidentally, the merger was part of a worldwide effort by KO management to mitigate the effects of slowing demand through cost savings. The Brexit is the swift kick to the groin that’ll hurt any company, BFG or otherwise.
Strangely enough, KO stock is the best performer among the featured giants. Whether it stays that way is a major question mark. Since mid-April of this year, KO has zigzagged in a perfectly tight consolidation pattern.
With the technicals not providing much in the way of clues, investors will likely turn to the fundamentals. The problem here is that both the top-line and the bottom-line are badly decelerating, making KO stock’s valuation against earnings rather rich.
As the pressure piles on, Coca-Cola is likely at greatest risk of getting KOd by the Brexit.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
