3q16 industrial sentiment survey final

Industrial Sentiment Survey 3Q16 Earnings Primer October 13, 2016

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INDUSTRIAL SENTIMENT SURVEY

ISSUE

DATE:

OCTOBER 13, 2016

3Q EARNINGS PRIMER • We survey institutional investors and analysts quarterly to gauge and track sentiment on topics pertaining to the earnings season, business climate, global economy and market drivers

Market Performance

Inside The Buy-side®

• Survey scope: 30 investors and analysts; buy-side firms manage $502.1B in assets and have $49.4B invested in Industrials

1

3Q16

OneOne-Year

S&P 500

3.3%

12.9%

S&P Industrial

3.6%

16.9%

1

As of 9’30’16

• Survey timeframe: September 9 to October 11, 2016 Region

Sector Focus

Role

N. America

13%

Europe

47%

53%

60% 20%

Asia Pacific

17%

87% Buy Side

Sell Side

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Industrials

Generalist

Latin America

3%

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2

Inside The Buy-sideÂŽ

WORD CLOUD: FREQUENCY OF OCCURRENCE

Note: Almost all comments were communicated in a negative context www.corbinperception.com

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3

KEY FINDINGS: STABILIZATION LARGELY EXPECTED THIS QUARTER BUT FUNDAMENTAL CONCERNS LOOM LARGE

Inside The Buy-side®

#1

Neutral Sentiment En Vogue Though Investors Describe Their Stance As More Cautious Relative To What They Are Hearing From Management; Earnings Largely Expected To “Meet”

•

Trends in executive tone have warmed somewhat with nearly half of investors and analysts describing management as neutral and fewer as bearish this quarter

•

Investor sentiment is tightening – no outright bears or bulls BUT those asserting they are neutral or neutral to bearish have nearly doubled QoQ

•

58% expect this quarter’s earnings to be in line with consensus; fewer are expecting misses

•

3Q KPIs are largely predicted to be in line with 2Q results; notably, those expecting an improvement in revenue ticked up while fewer expect an improvement in margins QoQ

#2

Sentiment On Global Economies Shifting While Mixed Sentiment On China’s Health Makes It A Wildcard

•

While views that China’s economy will improve in the near-term increased this quarter, China topped unaided concerns (our separate channel checks suggest Asia-based investors are concerned about a “hard landing”)

•

Investors and analysts report being more positive on several emerging market economies while those expecting the Eurozone to worsen declined significantly

#3

Industrial Valuations Seen As Frothy While Certain Shifts In Subsector Sentiment Are Notable

•

92% believe Industrial valuations are fairly or over valued; those describing their investment activity as “holding” climbed QoQ

•

Ag sees largest spike in bearish sentiment while concerns around Non-resi Construction are pronounced, a major erosion in sentiment QoQ, and views on O&G markets deteriorate somewhat www.corbinperception.com

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4

EARNINGS EXPECTED TO MEET CONSENSUS; FEWER MISSES PREDICTED IN THE POST-1Q RESET…“NEW NORMAL” Expectations Regarding 3Q Earnings Performance Relative To Consensus 58% 50% 50%

Dec '15

Inside The Buy-side®

Mar '16 Sep '16

35% 34%

31%

Jun '16 13% 15% 16%

21%

Better Than

56%

21%

In Line

Worse Than

Better Than “3Q trends seem in-line with 2Q exit rate across most end markets, with Oil & Gas capex seemingly the only outlier, which continued to decelerate.” Buy Side | N.A. “Good momentum continuing from 2Q16.” Sell Side | Europe “All forex.” Sell Side | Europe “Ongoing operating leverage of companies will continue to drive results, upside for further price recovery of materials.” Sell Side | Europe www.corbinperception.com

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5

3Q KPIS LARGELY PREDICTED TO STABILIZE THOUGH VIEWS ON EPS AND MARGIN IMPROVEMENT REVERSED COURSE Revenue

EPS

72%

53% 46%

37%

41%

40%

48%

45%

40% 29%

Inside The Buy-side®

30%

10%

15%

19%

Improving

35%

23%

25% 16%

18%

Staying the Same

Worsening

Improving

Staying the Same

Cash Flow

44% 46%

40%

29%

46%

Worsening

36%

25%

49% 38%

36% 37%

35% 25% 23%

20%

19%

Margins

58% 37% 38%

40%

37% 31% 31%

30%

35%

31%

23%

15% 4%

Improving

Staying the Same

Worsening

Dec '15 www.corbinperception.com

Mar '16

Improving

Jun '16

Staying the Same

Worsening

Sep '16 Follow us @CorbinResearch

6

THINGS THAT MAKE US GO HMMMMM…MANAGEMENT TONE CHARACTERIZED AS “NEUTRAL” AND LESS DOWNBEAT QOQ

Inside The Buy-side®

Jun ‘16

Sep ’16 QoQ Notable Changes

3%

4%

36%

37%

38%

-20 pts

27%

+16 pts

35%

+10 pts

58% Bullish Cautiously Optimistic Neutral

33% 11%

Neutral to Bearish

48%

+15 pts

Bearish 28%

Management Tone www.corbinperception.com

25% 6%

11%

Investor Sentiment

Management Tone

-17 pts

-6 pts

Investor Sentiment Follow us @CorbinResearch

7

STRAIGHT FROM THE BUY / SELL SIDE: ON SENTIMENT Bullish “Forex.” Sell Side | Europe “Restructuring during the last few years has prepared companies and increased operating leverage.”

Sell Side | Europe

Inside The Buy-side®

“Belief in management.” Sell Side | Europe

Neutral “Slowing GDP worldwide.” Sell Side | N.A. “End market trends.” Buy Side | N.A. “Sector rotation out of defensive dividend stocks into cyclicals.” Buy Side | N.A.

Bearish “ISM, short cycle orders, and declining plateau in autos.” Buy Side | N.A. “Lack

of productivity improvement.” Buy Side | N.A.

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INVESTORS REVERT TO HOLDING PATTERN AFTER MAKING SOME MOVES LAST QUARTER How Would You Describe Your Recent Activity In Industrials?

54%

Dec '15

34%

Inside The Buy-side®

Mar '16

24%

Jun '16* Sep '16

15%

19%

8%

Net Buyer

24%

54%

29%

34% 25%26% 19%

18% 6%

8%

Net Seller

Holding

Rotating

Holding “Already bearishly positioned.” Buy Side | N.A. “We have a service-related bias in Industrials. Will look selectively to take more cyclical risk if valuation multiples compress sufficiently.” Buy Side | N.A. “Asset mix decisions.” Buy Side | N.A.

*June 2016 values do not equal 100% due to 3% “Liquidating” not displayed on chart www.corbinperception.com

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9

TREND: PRODUCT AND SERVICE ORDER RATES SHOULD “REMAIN THE SAME” QOQ; ANOTHER “STABILIZATION” DATA POINT

ShortShort-cycle Products

LongLong-cycle Products

3%

3% 8%

14%

10%

Inside The Buy-side®

30%

19%

37%

Services 15%

30% 34%

45% 55%

39%

35% 31%

29%

Mar '16

Jun '16

Mar '16

35%

26%

18% Sep '16

57%

26%

35%

Accelerate Somewhat

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72% 40%

67%

14%

46% 14%

13% Jun '16

Remain the Same

Sep '16

Mar '16

Decelerate Somewhat

Jun '16

Sep '16

Strongly Decelerate

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10

92% CLASSIFY INDUSTRIALS AS FAIRLY TO OVERVALUED; A STOCK PICKER’S MARKET IS UPON US

Inside The Buy-side®

How Would You Classify Industrial Valuations In General?

44%

48%

Fairly

Over

8% Under

Which MarketMarket-cap Theme Is Currently Most Appealing?

50%

Believe Share Buybacks Are Not A Good Use Of Excess Free Cash Given Current Valuations

48% Assert the Industrial Sector Is In A Recession (up from 46% QoQ But Down From 69% In Dec ‘15)

14%

84%

Small

Are Placing More Emphasis On Balance Sheet Strength When Making An Investment Decision (up from 74% QoQ) QoQ)

36%

0% Micro

67%

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Mid

Large

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STRAIGHT FROM THE BUY / SELL SIDE: ON MARKET-CAP THEMES LargeLarge-cap “Are generally more stable, diverse earnings streams.” Buy Side | N.A

Inside The Buy-side®

“Most appealing because mid-cap valuations are most extended and I expect increasing volatility for small-caps. For large-caps, valuations are pretty comparable to history, so I’d give the nod to large caps at the moment.” Buy Side | N.A. “Have access to the most financing options.” Sell Side | N.A

MidMid-Cap “There is more growth coming from mid-cap names.” Buy Side | N.A “More self-help opportunities in slow-growing environment.” Sell Side | N.A. “Forex benefit.” Sell Side | Europe

SmallSmall-cap “Management decisions come through to the bottom line more effectively and quickly.” Sell Side | Europe

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12

SENTIMENT ON INDIA REMAINS STRONG WHILE CHINA SEEN AS IMPROVING (OUR CHANNEL CHECKS WOULD SUGGEST OTHERWISE) Over The Next 6 Months, What Are Your Expectations For The Following Economies?

India

54%

38%

8% +2 pts

-2 pts U.S.

42%

39%

19% NC

Inside The Buy-side®

-11 pts China

38%

27%

35% +3 pts

+21 pts Southeast Asia

33%

63%

4% -14 pts

+1 pt LatAm (ex-Brazil)

29%

46%

25% -9 pts

+3 pts 63% report Eurozone 27% being -1 pts “somewhat Mexico 26% concerned” -17 pts or “not concerned” Brazil 25% about Brexit +5 pts fallout Japan 4% +4 pts www.corbinperception.com

50%

23% -30 pts

61%

13% -1 pts

54% 63% Improving

21% -22 pts 33%

Staying the Same

Worsening

-5 pts

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13

AROUND THE WORLD: CONCERN ON NON-RESI CONSTRUCTION SPIKES Over The Next 6 Months, What Are Your Expectations For The Following Economies?

Housing/Resi Const.

39%

39%

22%

Inside The Buy-side®

+6 pts FX Headwinds

+7 pts 32%

41%

27%

-3 pts Oil & Gas Markets

+1 pts 30%

44%

26%

-19 pts Non-resi Const.

17%

+15 pts 44%

39%

-16 pts Global Capex Spending

8%

+30 pts 57%

35%

+5 pts Improving

www.corbinperception.com

-9 pts Staying the Same

Worsening

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14

SOME SIGNIFICANT SHIFTS IN SUBSECTOR SENTIMENT TAKING PLACE

Predicted To Grow Slower Than GDP

Predicted To Grow Faster Than GDP 65% 63%

Inside The Buy-side®

Building Products

60% 55%

Resi Construction

50% 45%

Water

Defense

Commercial Aero

50% 66%

Distribution

46% 45%

Industrial Equipment

46% 38%

Sentiment On Building Products And Resi Construction Remain Strong While Bulls Retreat On NonNon-resi Construction www.corbinperception.com

73%

Metals & Mining

50% 40%

Sep '16

68%

50% 55%

Machinery

37% Jun '16

Transportation (Trucking)

39% 42%

52%

Non-resi Construction

43%

Agriculture

50%

Jun '16

Sep '16

Ag Moving Back Into The Top 6 (With The Biggest Spike In Bearishness) And Metals & Mining Seeing Some Love Follow us @CorbinResearch

15

MARKET TO TRUMP: GET OFF YOUR STUMP

Inside The Buy-side®

Who Will Have The Most Positive Least Negative Impact On Markets?

Jun ‘16 '16

26%

Sep Sep '16 ‘16

27%

43%

23%

58%

8%

11%

4%

85% Survey Says: The Hillster (2 for 2) Jun Jun '16 ‘16

11%

Sep ‘16 '16

4% 19%

23%

40%

62%

26%

15%

23% Very Negative www.corbinperception.com

Negative

Neutral

Positive

Very Positive

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