Page 1

|

IF IT’S CORBIN, IT’S ACTIONABLE

1Q18 Earnings Primer Industrial Sentiment Survey April 17, 2018 CORBINADVISORS.COM

|


Inside The Buy-sideÂŽ Industrial Sentiment Survey

Issue Date: April 17, 2018

For over a decade, we have surveyed global investors and analysts on the equity markets, world economies and business climate. We share our research broadly with corporate executives, investor relations (IR) professionals and the financial community.1

Market Performance

Survey Scope: 25 investors and analysts globally; buyside firms manage $1.9 trillion in assets and have $256 billion invested in industrials

YTD*

YoY

S&P 500

(2.0%)

11.8%

S&P Industrial

(1.0%)

12.0%

* As of Mar. 29, 2018

Survey Timeframe: Feb. 26 – Apr. 4, 2018

Role

Sector Focus

Region 4% 12%

35%

40% 60%

Buy Side

1

Sell Side

The Industrial Sentiment Survey was launched Jun 5, 2015

65%

Industrials

Generalist

CORBINADVISORS.COM

24%

N. America

60%

Europe

Asia

Other

2


Word Cloud: Frequency of Occurrence

CORBINADVISORS.COM

3


Key Findings: Global Growth and Tax Reform Drive Strong Expectations; Heightened Concerns Weigh on Sentiment Somewhat #1 Continued Growth Expected in 2018 but Not Without Margin Pressure  Majority continue to describe sentiment as Neutral to Bullish or Bullish, management tone still described as upbeat  Greater than 95% expect earnings to meet or beat consensus with nearly 70% expecting tax reform to contribute up to 50

bps to 2018 U.S. GDP  Organic growth and EPS are expected to improve (albeit at muted levels sequentially), though margin outlooks temper

amid inflation pressure  2018 organic growth expectations shift to 5.0%+ from 4.0%-5.0% last quarter as global capex still expected to improve

over the next six months  Net Buyers increase to 39% from 31% QoQ, a survey high

#2 Heightened Concerns Driven by the Fed, Trump and Inflation Eroding the Edges of Sentiment  More than 60% note High concern levels about rising input costs (aided) and trade wars, while top three unaided worries

include interest rate hikes, trade wars and inflation, respectively  All global economies except India and China see pullbacks in positive sentiment; Eurozone, Mexico and Japan see the

largest degradations  More than 60% believe we are Mid-to-Late or Late innings in the cycle; 46% expect Industrials to peak in 2019

#3 Significant Shifts in Sub-sector Sentiment Identified  89% expect Defense to Grow Faster than GDP, the highest sentiment ever recorded for any sub-sector  Non-Resi and Resi Construction see deteriorating sentiment following continued interest rates hikes; to that end, nearly

75% expect Fed Funds rate to climb to between 2.0% and 2.25% at YE 2018  Chemicals gets a double-whammy; bulls decrease to 44% from 67% while bears jump to 17% from 0% sequentially CORBINADVISORS.COM

4


2018 Outlooks Come in Strong as Expected; 5.0%+ Organic Growth Anticipated In Line

2018 Guidance Outlooks Vs. Expectations

“China doing better.” Buy Side, Generalist, N. America “Seemingly conservative organic guidance given macro data points.” Sell Side, Industrials, N. America

65%

“The implication of tax cuts hasn’t fully sunk in.” Sell Side, Industrials, N. America

Worse Than

22% 13%

Better Than

In Line

“Cautious organic revenue growth but higher tax-driven earnings.” Buy Side, Generalist, Asia “I am a little more optimistic and most Industrial executives are a little bit guarded about growth because of White House uncertainties.” Sell Side, Industrials, N. America

Worse Than

Expectations for 2018 Organic Growth

31% 17% 6%

<3.0%

31%

25% 17%

13% 6%

0% 3.0%

62%

6%

0%

3.5%

4.0% Dec '17

31% 17%

0%

4.5%

5.0%

>5.0%

Mar '18

CORBINADVISORS.COM

5


Continued Strong Expectations Driven by Global Growth and U.S. Tax Reform; Sequential Improvement Expected but at a Slightly Muted Level Expectations Regarding 1Q18 Earnings Performance Relative to Consensus

Tax Reform Global Growth

Jun '17 Sep '17

52% 54% 50%

52% 46%

43% 35%

39%

Dec '17 Mar '18

13% 7%

5% Better Than

60%

Expect Sequential Earnings Growth

In Line

96%

vs. 75% Last Quarter

4%

Worse Than

Expect In Line to Better Than Consensus Results vs. 93% Last Quarter

CORBINADVISORS.COM

6


Commentary on Earnings Expectations Vs. Consensus Better Than – 50%

In Line – 46%

“Tax reform and organic growth.” Buy Side,

“General economic acceleration hampered somewhat by adverse weather.” Buy Side,

Industrials, N. America

Generalist, N. America

“Improving demand and better pricing.” Buy Side, Industrials, N. America

“Lower tax rate and pick-up in Europe and the U.S.”

“Uncertainty over further global economic expansion.” Buy Side, Generalist, Europe

Buy Side, Generalist, N. America

“Tough comps and FX.” Buy Side, Industrials, Europe

“Acceleration of macro data.” Sell Side, Industrials, N.

“Key leading indicators growing less than a year ago, which will cause revenue disappointments. EPS may beat as analysts still don’t know the full effects of U.S. tax reform.” Buy Side, Generalist, Asia

America

“Economic trends have been favorable and a trade war hasn’t started yet.” Sell Side, Industrials, N. America

“Tax reform and global growth.” Sell Side, Generalist, N. America

* Worse Than (4%)

“New tax cuts a big factor sequentially; guidance toward impacts has been pretty granular and likely baked into consensus.” Sell Side, Industrials, N. America

CORBINADVISORS.COM

7


Revenue and EPS Still Expected to Expand While Cash Flow Growth Cools Likely as Companies Invest in Organic Growth, Capacity Expansion and Technology Key Performance Indicators

83% 80% 75% 65%

Revenue

EPS Growth 79% 74% 67% 66%

20%17% 15% 10%

15% 10%

29% 19% 17% 15%

10%

4%

0% Improving

Staying the Same

Worsening

Improving

Cash Flow 71%

Worsening

71% 56%

54% 42% 25%

38%

31%

19% 4%

Improving

Staying the Same

7% 4%

Operating Margins

74%

46%

19%

Staying the Same

12%

25%

42% 33%

7% 8%

4% Improving

Worsening Jun '17

33%

50%

Sep '17

Dec '17

CORBINADVISORS.COM

Staying the Same

25% 19% 11%

Worsening

Mar '18 8


Topics of Interest for 1Q18 Earnings Calls

1

Price/Cost Dynamics, Impact on Margins

2

Organic Growth Trends

3

Demand Environment

Buy Side

Sell Side

“Pricing power.” Industrials, N. America

“Changes in organic activity or growth as a derivative of tax cuts.” Industrials, N. America

“U.S. macro demand.” Industrials, N. America “Implications of tariffs and a trade war, price/cost dynamics, M&A pipeline and use of tax reform benefits.” Industrials, N. America “Plans for organic growth and margin expansion.” Generalist, N. America

“Material input costs, material shortages, lead times for supplies.” Industrials, N. America “Pricing.” Industrials, N. America “Rates.” Industrials, N. America “New product development, R&D investment, capital investment.” Generalist, N. America

“Margin opportunities and risks as well as demand levels.” Generalist, N. America “Price versus cost trends.” Generalist, N. America “Organic growth trends and the elevated prices for M&A.” Generalist, Asia

CORBINADVISORS.COM

9


Investor Sentiment and Perception of Management Tone Remain at Elevated Levels; Despite Heightened Concerns, Bearish Views Trend to Zero

Investor Sentiment

73% 31%

22%

Management Tone

83%

96%

92% 40%

39%

52%

57%

4% 4%

4%

Dec '17

Mar '18

Bullish Neutral to Bullish Neutral

42%

61%

Neutral to Bearish Bearish

17% 10% Dec '17

17% Mar '18

CORBINADVISORS.COM

10


Tax Reform to Drive Near-term Results; Nearly 70% Expect Up to 50bps Impact on 2018 U.S. GDP Growth 0 – 0.25% Tax Reform Impact on 2018 U.S. GDP Growth

“Overall, it gives a modest boost to the economy, although companies are likely to reinvest more of the savings; the net benefit to S&P EPS is lower than originally perceived.” Buy Side, Generalist, N. America “It’s a bad policy, rushed and over the long term, bad for the U.S.; it adds to the deficit.” Buy Side, Generalist, N. America

37% 32%

0.25 – 0.50% 27%

“Positive.” Buy Side, Industrials, Europe “It’s stupid to give mega stimuli when unemployment is at a record low, interest rates are near zero and it’s not funded, so a huge deficit is looming.” Buy Side, Generalist, Asia

4%

“It’s sad; we should be able to have a national discussion on what we want to do with our taxes. Instead, we are only offered the choice of taxes up or down, without any regard for what we should be focused on.” Sell Side, Industrials, N. America “I hope it’s not temporary.” Sell Side, Industrials, N. America

0 - 0.25%

0.25 - 0.50% 0.50 - 0.75%

>0.75%

0.50 – 0.75% “It’s very positive for capex, corporate cash flows, reported earnings and consumer take-home pay.” Buy Side, Generalist, N. America >0.75% “On the corporate side, it’s very positive but on the consumer and individual side, a bit less so.” Sell Side, Generalist, N. America CORBINADVISORS.COM

11


Investors Believe We Are Mid-to-Late in the Industrial Cycle with Peak Earnings Generally Not Expected until 2019/2020; Dark Clouds Loom Where Are We in the Industrial Cycle?

How Much Concern Do You Have on Following Factorsâ&#x20AC;&#x2122; Impact on the Generally Positive Growth Momentum Companies are Experiencing?

52% 44% 41%

4%

11% 8%

8% 0%

Early

4% Mid Dec '17

Mid-toLate Mar '18

Late

36% 41%

17% 16%

27%

Trade Wars

Rising Input Costs

9%

25%

20%

31%

8%

Dec '17

2020

After 2020

31%

4%

0% 2019

High

42%

39%

2018

Moderate

Volatile FX

50%

32%

12%

Rising Interest Rates

How Would You Describe Your Current Investment Activity?

42%

40%

45%

23%

No Concern

When Do You Think Industrial Earnings Will Peak? 46%

64%

67%

18% 12%13%

Early-toMid Sep '17

19%

36%

28%31% 26%

Net Buyer

Mar '18 CORBINADVISORS.COM

8%

21% 19%

13%

Net Seller Sep '17

Holding Dec '17

17%

Rotating Mar '18 12


Commentary on Top Concerns

1

Interest Rate Hikes

73%

2

3

Trade Wars

Inflation

Expect YE 2018 Fed Funds Rate to be 2.0% or 2.25%

Buy Side

Sell Side

“1) Materials costs; 2) Trade wars; 3) Geopolitical threats.” Industrials, N. America

“1) Interest rate hikes coming in above expectations; 2) Commodity inflation; 3) Trade wars and rhetoric.” Industrials, N. America

“1) Trade war; 2) Interest rates; 3) Input costs.” Industrials, N. America

“1) Rates; 2) Trade barriers; 3) FX.” Industrials, N. America

“1) Too rapid of a macro improvement; 2) Spiking rates; 3) inflation.”

“1) Proliferation of nuclear technology; 2) Proliferation of night-vision equipment now being used by the Taliban and the implications for our military; 3) Inflationary impacts.” Industrials, N. America

Industrials, N. America

“1) Higher interest rates; 2) Inflation; 3) North Korea.” Industrials, N. America

“1) Trump; 2) Inflation recapture; 3) Slowing growth.” Industrials, N. America

“1) Trade war; 2) FX; 3) Valuation.” Industrials, Europe

“1) Rising interest rates; 2) Rising input costs; 3) Trade wars.”

“1) Tariffs; 2) Rising materials costs; 3) Geopolitical event.”

Industrials, Europe

Generalist, N. America

“1) Trade wars; 2) Interest rates; 3) Irrational exuberance.” Generalist, N. America

“1) President Trump volatility; 2) Fed may tighten rates too fast.” Generalist, N. America

“1) Global trade wars; 2) Spike in commodity costs; 3) Rising interest rates.” Generalist, N. America “1) Interest rates rising; 2) Trade war; 3) Inflation.” Generalist, Europe “1) Interest rates; 2) Trade war; 3) Housing price collapse.” Generalist, Asia CORBINADVISORS.COM

13


Around the World: Significant Swings in Economic Growth Views; India and China See Increased Enthusiasm, While Japan, Eurozone and Mexico Outlooks Dampen Global Economy Expectations Over the Next Six Months

U.S.

59%

27%

14% +10 pts

-15 pts Brazil

52%

34%

14% +6 pts

-8 pts India

52%

43%

5% -10 pts

+22 pts Eurozone

48%

48%

4% +4 pts

-30 pts Southeast Asia

38%

57%

5% +1 pt

+2 pts LatinAm (ex-Brazil)

24%

47%

29%

-24 pts China

+13 pts 24%

57%

19% -18 pts

+17 pts Japan

9%

82%

9%

-32 pts

-2 pts

Mexico

71%

29%

-31 pts (from 4Q17 Improving) Improving

+14 pts Staying The Same

CORBINADVISORS.COM

Worsening 14


Global Capex Predicted to Remain Strong, While Construction Bulls Erode Expectations Over the Next Six Months

Global Capex

77%

23%

+3 pts

Worsening, UNCH

Oil & Gas Markets

55%

41%

4%

-37 pts Global PMI

+4 pts 27%

32%

41%

+4 pts Housing/Resi. Const.

-22 pts 23%

64%

13% +5 pts

-25 pts Non-Resi Const.

23%

73%

4%

-35 pts FX Headwinds

UNCH

20%

55%

25% +2 pts

+5 pts Company Input Costs

14%

19%

67%

+3 pts

+9 pts Improving

Staying The Same CORBINADVISORS.COM

Worsening 15


Significant Shifts in Industries Identified

Predicted to Grow Faster than GDP 67%

Defense 50%

Commercial Aerospace

89%

68%

52% 55%

Metals & Mining

Machinery

52%

Materials

44%

Chemicals

44%

79% 77%

21%

Agriculture

Chemicals

34% 13% 32% 13% 21% 0% 17%

Metals & Mining

14% 11%

Water

13% 11%

67%

Machinery

50% 42%

Transportation

63%

Resi. Const.

46% 42%

Building Products

54%

Automotive

Non-resi Const.

58% 52%

Ind. Equipment & Comp.

Dec '17

Predicted to Grow Slower than GDP

Building Products

Mar '18

4% 10% 4% 10% Dec '17

Defense Sentiment Climbs to Above-Record Survey Levels; Commercial Aero Flies Higher

Mar '18

Auto Remains the Laggard for Fifth Consecutive Quarter; Bearish Sentiment Builds in Construction and Chemicals

CORBINADVISORS.COM

16


ABOUT US

CORBIN ADVISORS


About Us Deep Experience. Deeply Committed. Founded

2007

Team Experience

~200 Years Combined

Location

Hartford, CT (US)

Client Size

$250M to $150B+

Founded in 2007 by Rebecca Corbin

Track record of value creation and committed to the highest quality standards and client satisfaction

Extensive C-suite and board-level advisory experience

Thought leaders: Leading-edge research on investor sentiment and best practices; quarterly surveys regularly featured on CNBC

Not pictured: Catherine Hazzard John Brownell

CORBINADVISORS.COM

18


Our Proven Methodology We Deliver Insights and Advice Resulting in Measurable Value Creation

Our proprietary approach combines stakeholder research, investor engagement and communication strategies to unlock embedded value. Leveraging deep experience across sectors, market-caps and various company situations, we engage with public companies on both high-level strategy and tactical execution. Our candid advice and actionable recommendations consistently result in value creation. Contact: Jeffrey Goldsmith Jeffrey.Goldsmith@CorbinAdvisors.com CORBINADVISORS.COM

19

Industrial sentiment survey april 2018  
Industrial sentiment survey april 2018