Industrial Sector Sentiment Survey June '15

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INSIDE THE BUY-SIDE® INDUSTRIAL SECTOR SENTIMENT SURVEY ISSUE DATE: JUNE 15, 2015

In the inaugural issue of Corbin Perception’s Industrial Sector Sentiment Survey, we pulsed investor and analyst views following flattish year-to-date sector performance despite some signs of life in certain end markets.

Our survey 2, comprising input from 58 investors and analysts globally who follow the industrial sector, finds sentiment neutral to more bullish, as expectations seemingly have reset following largely uninspiring first quarter results and forward-looking commentary validating muted organic growth in 2015.

Our independent poll identifies emerging trends, vertical bright spots and views around cycle timing and pockets of recovery that serve to assist both investors and corporates with navigating the diverse global industrial landscape.

Inside The Buy-Side ®

Participant Stats Contributing buy side firms manage $3.2 trillion in total assets and have $206 billion invested in industrials as of March 31, 20153

Role Buy Side | 50% Sell Side | 50%

Sector Focus Industrials | 88% Generalist | 12%

Region N.A. | 48% Europe | 36% Asia | 9% LatAm | 2% Other | 5%

1 2 3

Price Performance1 Month-to-date Year-to-date One-year

S&P Industrials 0.2% (1.2%) 2.9%

S&P 500 (0.6%) 1.7% 8.5%

About Corbin Perception Corbin Perception is a leading investor research and IR advisory firm assisting public companies with creating longterm shareholder value. We leverage our broad company and industry experience, knowledge of best practices and benchmarking capabilities to provide research-driven counsel that enables our clients, sophisticated mega-caps to micro-caps worldwide across diverse sectors, to differentiate their company as an investment.

Our research, Inside The Buyside®, based on ongoing investor sentiment surveys, is covered by news affiliates worldwide and featured regularly on CNBC’s Squawk on the Street.

CorbinPerception.com info@corbinperception.com (860) 321-7309 Follow us @CorbinResearch Send us questions/feedback: Info@CorbinPerception.com

As of June 12, 2015 Timeframe: June 4 - 10, 2015 Source: Thomson Reuters 1

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Our Survey Yields Five Key Industrial Sector Findings.

Finding #1: Opinions regarding industrial valuations are split; however, 55% believe multiples either have room to expand or have entered a “new normal”...

How Would You Describe Industrial Valuation Multiples?

45% 37% 18%

Are at a Cycle High

Have Room to Expand

Are at a "New Normal"

…And while 45% maintain we are at a cycle high, only 14% are net sellers.

Inside The Buy-Side ®

How Would You Describe Your Investment Regarding Industrials?

34%

31% 21% 14%

Rotating

Net Buyer

Holding

Net Seller

Surveyed investors and analysts largely cite the following drivers, all execution-related, for post-Great Recession era industrial valuations:   

78% | Operating leverage/margin expansion 73% | FCF generation 67% | Capital allocation

Notably, the low interest rate environment and QE are not seen as significant enablers.

Representative Quotes Are at a Cycle High “They look expensive on an absolute and especially relative basis…certainly in the context of likely rise in rates and perpetually slowing growth.” Buy Side | North America “Valuations look relatively stretched at present. May remain elevated for a while but will ultimately fall back.”

Sell Side | Europe

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“Low interest rates have caused multiple expansion on lower discount rates. When long bond yields start to rise, the duration-linked stocks will de-rate.” Sell Side | Europe “Are at all-time high (or close to) multiples and interests at zero.” Buy Side | Europe Have Room to Expand “They are high but relative to market are not unusual. Valuations can grind higher if economy picks back up.”

Sell Side | North America

“Transportation has taken a beating, pricing in recent declines. Not a great environment, but could go higher with the passage of time.” Buy Side | North America “Mid-cycle slowdown with industrials underperforming the market. I expect an acceleration of growth to drive industrials to perform.” Buy Side | North America “Relative to the market, I think industrials can see some expansion as leading economic indicators improve throughout the year. But we are getting close to the cycle high. I expect to see them go from 16 to 17x before peaking.” Buy Side | North America

Inside The Buy-Side ®

“I think earnings have been somewhat depressed in this benign macro growth environment and as EPS growth accelerates, I believe multiples can still expand. Some stocks screen expensive but if you believe EPS growth can accelerate, multiples will also expand.” Buy Side | North America Are at a “New Normal” “Mid- to high-teens FCF multiples seem fair.” Buy Side | North America “Factoring in a slowdown in the economic environment.” Sell Side | Asia “We are generally across the board around mid-cycle levels.” Buy Side | North America “Industrials look about fair relative to the market and considering the level of interest rates.” Buy Side | North America

Representative Quotes Rotating “I’ve already rotated but staying in larger-cap, later cycle, defensive, quality names MOSTLY with a little more risk around the edges.” Buy Side | North America “I am switching to sub-sector with stronger growth (i.e., non-resi).” Buy Side | North America “Already underweight but reducing valuation risk by rotating into, primarily, stable and lower-geared names.”

Buy Side | Europe

Net Buyer “Cycles are compressing into months versus years and valuations are reasonable relative to both history and versus the S&P.” Buy Side | North America “Based on an uptick in U.S. construction, renewed growth in automation.” Buy Side | Europe 3

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Finding #2: Expectations for tepid growth in 2015 continue; views on 2016 mixed to slightly more constructive…

What Are You Looking For Industrials To Achieve For FY 2015 Organic Growth?

49% 40%

7%

4%

0% Negative

Flat

1 - 2%

3 - 4%

5 - 6%

0% 7% +

Of note, investors maintaining expectations for 5%+ organic growth, 4% of the survey group, reside in Europe and Asia. They believe Industrial Equipment & Components, Machinery and Materials will all grow faster relative to global GDP and are largely downbeat on Agriculture.

Representative Quotes

Inside The Buy-Side ®

1 – 2% “Modest environment, no recession.” Buy Side | North America “Slower improvement ramp in Developed Markets and sluggish Emerging Markets.” Buy Side | North America “Destocking driven by FX and Oil & Gas have depressed temporarily.” Buy Side | North America 3 – 4% “The group was slightly above 2% in Q1. Expect some modest improvement in U.S. and Europe in H2.” Sell Side | North America

“Led by a recovery in cyclical construction markets.” Sell Side | Europe “We have passed peak sector growth of >5%.” Buy Side | Europe

What Are Your Expectations For 2016 Sales Growth Rates?

36%

42%

22%

About the Same

Faster than 2015

Slower than 2015 4

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…While fear of a U.S. recession in the next 12 to 24 months is minimal with 60% predicting a downturn 2 – 3 years out.

When Do You Think The U.S. Will Have Its Next Recession?

60%

27% 13% 0% Less than 1 Year

1 - 2 Years

2 - 3 Years

3 - 5 Years

Finding #3: Sector differentiation is an important theme. Optimism abounds regarding Western Europe (a view held by both North American and European constituencies), resi and non-resi construction and the U.S. consumer, while pessimism surrounds Oil & Gas, global capex, a continued strong dollar and China.

Inside The Buy-Side ®

Looking Out Over The Next 6 Months, How Do You See These Issues Progressing?

Western Europe Economy Resi Construction Non-Resi Construction U.S. Consumer Spending U.S. Economy India Economy Oil & Gas Markets Global Capex Spending Impact of Strong Dollar China Economy 0%

20% Improving

40%

60%

Staying the Same

Worsening

80%

100%

5

速

How Do You See End Markets Performing Relative To Global GDP Over 12 Months?

Building Products Non-resi Construction Commercial Aerospace Resi Construction Automotive Defense Distribution Transportation (Trucks) Industrial Equip. & Comp.

Machinery Water Materials Agriculture Metals & Mining 0%

20%

Inside The Buy-Side 速

Grow Faster

40% Grow In Line

60%

80%

100%

Grow Slower

Finding #4: Excitement around M&A and share repurchase is waning with reinvestment in organic growth the overwhelming top preference for capital allocation.

For Industrials Generally, What Is Your Preferred Use Of Excess Cash?

61%

15%

Capex/ Org. Inv.

M&A

11%

9%

Share Repurchase

Debt Reduction

4% Dividend Growth

Are Transaction Multiples Too High For Industrials M&A? 63%

Top Three Reasons 37%

1. 58% | Overly optimistic growth assumptions 2. 58% | Unsustainable low interest rate environment 3. 55% | Many transactions unlikely to earn their cost of capital

Yes

No 6

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Finding #5: On every channel check, except for 2015 organic growth predictions4, the buy side demonstrates greater bullishness than the sell side. It appears as if additional downward revisions are largely priced in and any potential short term-related stock price pressure could prove a buying opportunity.

Do You Expect Further Guidance Revisions In The Back Half Of The Year?

57%

29% 14%

No

Yes, Downward

Yes, Upward

Inside The Buy-Side ®

Representative Quotes “Growth expectations in 2H still seem a bit optimistic. I see modest tweaks on subpar organic growth.” Sell Side | North America

“Companies have been sticking to 2015 guidance but likely to reduce as year progresses. Analysts chasing numbers down. Just catching up with reality.” Buy Side | North America “Still too optimistic; I get the sense that managements want to see a few more cards turned over before they cut further. Less help from raw materials/hedges/operating leverage gets tougher as organic revenue decelerates to stall speed.” Buy Side | North America “We haven't even seen the cuts yet in energy exposed stocks, so I think we see another round of cuts to reflect incremental pricing pressure. Not sure if that actually matters for the stocks though.” Buy Side | North America “Slight downward revisions on slower growth pick-up unless we see acceleration in 2H.” Buy Side | North America “Nothing has accelerated from 1Q and generally guidance assumes an improving global environment.” Buy Side | North America

“We have seen a highly cautious stance taken on development for 2H15 and 2016, which are now in consensus expectations. Risk remains across a number of stocks in our 74-stock universe.” Sell Side | Europe “Risk still on the downside, particularly when it comes to emerging market exposure (China, Brazil, Russia, etc.).”

Sell Side | Europe

“Global, but especially U.S., estimates for both revenues and earnings are too high; 2015 should be trimmed 510% but the big issue will be companies' 2016 guidance towards end of 2015; that's when analysts will realise accelerating organic growth and margin expansion is not feasible.” Buy Side | Europe 4

Buy side contributors largely forecast 1 – 2% organic growth for 2015 vs. sell side forecast of 3 – 4% 7

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What Advice Would You Give Management Teams To Attract Your Interest?

“Maintain an equilibrium between capex and cash flow generation, not go back to the excessive levels precrisis.” Sell Side | Europe “Don’t underinvest in R&D or efficiencies.” Sell Side | North America “Take the opportunity to invest in improved production efficiency now when demand for machinery is low and interest rates low.” Sell Side | Europe

“Assume this slow growth muddle continues for a few years and invest for outgrowth accordingly.”

Sell Side |

North America

“Think like an activist but don't jeopardize the long-term.” Buy Side | North America “Everything is relative. Don't wait for the next cycle to deploy capital. Whether you buy back stock or buy a competitor, the choice is relative to what you see today. Trying to time the market is not the right strategy. Act now.“ Buy Side | North America “Good organic growth, margin leverage, executions and prudent capital allocation are all key areas of focus.”

Buy Side | North America

“In a slow growth environment, plan conservatively, focus on improving margins and financial returns.“ Buy Side

Inside The Buy-Side ®

| North America

“Management has to consider being judged on use of capital and balance sheet; sitting with cash is unacceptable, especially in this rate environment.“ Buy Side | North America “Focus on selected number of activities where you have a strong market position; focus on organic growth.

Maintain financial discipline.” Sell Side | Europe “Allocate capital to long-term growth sectors with returns defendable from Asian competition.” Sell Side | Europe “Free cash flow optimisation consistent with sustainable competitive advantages in core business.“ Sell Side | Europe

“Watch out for excess capacity. Focus on competitive advantages.” Buy Side | North America “Keep financial gearing low or moderate. Invest in R&D. Be selective with M&A.“ Buy Side | Europe

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