Industrial Sentiment Survey - January 2017

|

IF IT’S CORBIN, IT’S ACTIONABLE.

|

Industrial Sentiment Survey 4Q16 Earnings Primer

CORBINADVISORS.COM 1

Issue Date: January 19, 2017

Inside The Buy-side® Industrial Sentiment Survey 4Q16 Earnings Primer  We survey institutional investors and sell-side analysts quarterly to

Market Performance1

gauge and track sentiment on topics pertaining to the earnings season, global economy and market drivers  We share our research broadly with corporate executives, investor

relations (IR) professionals and investors  Survey scope: 37 investors and analysts; buy-side firms manage

4Q16

One-Year

S&P 500

3.3%

11.2%

S&P Industrial

6.6%

16.1%

1

$272B in assets and have $23B invested in Industrials

As of Dec. 31, 2016

 Survey timeframe: Nov. 30, 2016 to Jan. 16, 2017

Sector Focus

Role

8%

By Region 62%

N. America

32%

68% 92% Buy Side

Sell Side

Industrials

Generalist

Europe

16%

Asia Pacific

16%

Latin America

6%

CORBIN ADVISORS 2

Word Cloud: Frequency Of Occurrence

CORBIN ADVISORS 3

Key Findings: Turning A Corner Following Several Quarters Of Ho-Hum

Optimism Abounds As 2017 Gets Underway #1

While Investors And Analysts Primarily Expect In Line Earnings, Positive Green Shoots Emerge



While 63% expect in line results relative to consensus, only 8% expect Worse Than; survey findings register the highest level of positivity since report inception (Sep. 2015)



Management tone described as more positive, a significant uptick from last quarter



60% expect 2017 guidance to be somewhat higher than 2016



Only 30% assert the Industrial sector is in recession, down from 69% in Dec. 2015; as well, industrial orders are finally expected to accelerate

#2

Things Are Looking Up And Valuations Are Reflecting Optimism But Rain Could Be On The Horizon



77% expect the domestic economy to improve and 61% predict GDP expansion over the next 6 months



88% report Industrial valuations are fairly to overvalued



65% expect U.S. FX headwinds to worsen over the next 6 months; while currency and inflation are leading concerns

#3

Subsector Sentiment (Almost) Universally Improves; Those Left For Dead Stage A Comeback As Investors Plow Capital Into Cyclicals



Amid a momentous sentiment shift, Materials return to favor and rank in-line with Building Products as most bullish; 65% now expect Materials to grow faster than GDP, up from only 18% in September



Deceleration in Autos: 43% predict subsector will grow slower than GDP, up from 33% last quarter, while flow of capital into Water likely to slow amid largest net increase in negative sentiment CORBIN ADVISORS 4

Expectations

Earnings Largely Expected To Be In Line With Consensus; Most NonDownbeat Views Since 3Q15 Expectations Regarding 4Q Earnings Performance Relative To Consensus

58%

Mar '16

63%

50% 50% Jun '16 Sep '16 Dec '16

35% 34%

29% 15% 16%

21%

21% 8%

Better Than

In Line

Worse Than

 92% predict 4Q earnings will be in line or better than consensus, while 50% expect a sequential improvement  Furthermore, 60% anticipate 2017 annual guidance to be above outlooks provided last year  In September 2015, expectations for worse than consensus results registered at 57% and have steadily

declined since  Only 30% assert the Industrial sector is in a recession, down from 48% QoQ and 69% YoY CORBIN ADVISORS 5

Expectations

On Earnings Expectations Vs. Consensus Better Than

In Line

Worse Than

“Improving sentiment, higher oil and gas prices.” Sell Side, N.A.

“Worldwide slowdown.

Infrastructure spending not likely until late 2018.” Sell Side, N.A.

“Lower volumes and pricing/ margins.” Buy Side, N.A.

“Better acceleration in animal spirits, spending post-election and seeing indicators tick up.” Sell Side, N.A.

“Ongoing cost cutting, better product mix and geographical diversification are positive catalysts, which are helping to reduce some of the seasonal slowdown.” Sell Side, Europe

“Industrials are not showing any inflection. Weather comp vs. 4Q15 will be difficult.” Sell Side, N.A. “Slowdown in capital investment and some cost pressure.” Sell Side, Europe

“Impact of demonetization.” Sell Side, Asia

“Consumer spending is cyclically high at end of year. This is supported by seasonally high sales during Christmas.” Sell Side, Asia

CORBIN ADVISORS 6

Expectations

Most KPIs Expected To Remain The Same Or Improve; Still, Some Trends Reverse And Margin Expansion Is A Question Mark Revenue

EPS 46% 40%

37% 30%

45% 41% 41% 37%

48%

39%

37%

35%

40%

40% 36%

31%

29%

19%

25% 22%

19% 15%

Improving

25%

23%

Staying the Same

Worsening

Improving

Cash Flow

Staying the Same

Worsening

Operating Margins 46%

58% 45% 37%38% 29%

46% 40%

37%

35%

36%

30% 36%

25% 25%23%

39% 38% 35% 31%

23%25%

19% 4%

Improving

Staying the Same

Improving

Worsening

Mar '16

Jun '16

Sep '16

Staying the Same

Worsening

Dec '16

CORBIN ADVISORS 7

Expectations

Strong Uptick In Order Rate Expectations Across The Board Short-cycle Products

14%

4%

3% 30%

19%

Long-cycle Products

7% 7%

37%

Services

3%

8%

10%

15%

15%

30% 30%

39%

55% 35%

72%

71% 26%

40%

67%

4% 29%

45%

34%

31%

14%

57% 63% 52% 46%

29%

35% 11%

Mar '16

Jun '16

Sep '16 Dec '16

35%

26%

18%

14%

13%

Mar '16

Jun '16

3% Sep '16 Dec '16

Strongly Decelerate

Decelerate Somewhat

Accelerate Somewhat

Strongly Accelerate

Mar '16

Jun '16

4% Sep '16 Dec '16

Remain the Same

CORBIN ADVISORS 8

Sentiment

Investor/Analyst Sentiment And Management Tone Further Underscores Improving Outlook Investor/Analyst Sentiment

Management Tone 4%

11% 38%

37% 60%

42% Bullish Neutral to Bullish 27%

Neutral Neutral to Bearish 30%

48% 20%

Bearish

35% 20%

17% Sep' 16

11%

Dec' 16

Sep' 16

Dec' 16

CORBIN ADVISORS 9

Sentiment

On Investor Sentiment Drivers Neutral to Bullish

Top Concerns (unaided)

“New Administration, higher oil prices.” Buy Side, N.A.

•

Valuation/Overheating Markets

“Gradual legislative approval for programs.” Buy Side,

•

GDP Growth

•

Inflation

•

Strong USD

•

Commodity Prices

•

Aggressive Rate Hikes

“Still seeing growth in the pipeline together with lower imports after protectionist measures.” Sell Side, Europe

•

Trade Policy

“Stable macro picture.” Sell Side, Asia

Trending Topics (unaided)

N.A.

“A lot of the 'Trump positives' and the rebound in Energy are baked in; strong USD could emerge as a headwind mid-year.” Sell Side, N.A. “Trump initiatives as a catalyst for change.” Sell Side, N.A.

•

Investment In Innovation/Technology (i.e., “digitalization”, “software”)

“Broad-based demand weakness.” Buy Side, N.A.

•

Cost-cutting Initiatives

“Valuations seem excessive.” Sell Side, N.A.

•

Tax Reform

“Economic cycle in Latin America.” Sell Side, LatAm

•

Operational Efficiency

•

Uncertainty

Neutral to Bearish

CORBIN ADVISORS 10

Sentiment

88% Continue To Classify Industrials As Fairly To Overvalued…

How Would You Classify Industrial Valuations In General?

44%

41%

48%

47%

Sep '16 Dec '16

8%

12%

Under

Fairly

Over

Undervalued

Fairly Valued

Overvalued

“IPOs of state-owned consumer companies draw investors’ attention.” Sell Side, Asia

“We don't use traditional valuation metrics. By our measures, Industrials are attractive at these levels but we understand that the normal metrics show them more fairly valued.” Buy Side, N.A.

“Excessive valuations and weak demand outlook.” Buy Side, N.A.

“Upside in target price.” Sell Side, LatAm

“Historically high P/Es.” Buy Side, N.A.

“All the good from Trump optimism is priced in without regard for potential risks in implementation.” Sell Side, N.A.

CORBIN ADVISORS 11

Sentiment

…And Despite Valuation Concerns, Investors Bust Out Of Rut And Deploy Capital How Would You Describe Your Recent Activity In Industrials?

54%

54%

41%

Mar '16 29%

Jun '16* Sep '16

25% 26%

24% 15%

19%

Dec '16

18% 6%

Net Buyer

18%

19% 20%

18%

8%

Net Seller

Holding

Rotating

Net Buyer

Holding

Net Seller

“Clients like the infrastructure angle.” Sell Side, N.A.

“Rates and GDP.” Sell Side, N.A.

“Valuations imply meaningful acceleration in global GDP growth, which remains uncertain.” Buy Side, N.A.

“Not positioned either way.”

“Group has been under owned for a long time; investors are rotating back in.” Sell Side, N.A.

Buy Side, Europe

*Jun ‘16 and Dec ‘16 values do not equal 100% due to 3% “Liquidating” not displayed on chart CORBIN ADVISORS 12

Going Forward

U.S. Sentiment Improves While Mexico Hits A Wall Over The Next Six Months, What Are Your Expectations For The Following Economies?

U.S.

6%

17%

77%

+35 pts

-13 pts

India

9%

34%

57%

+3 pts

+1 pt

Brazil

11%

46%

43%

+18pts

-10 pts

Southeast Asia

14%

46%

40%

+7 pts

+10 pts

China

26%

34%

40%

+2 pts Eurozone

-9 pts 14%

54%

32%

+5 pts Japan

-9 pts 5%

69%

26%

+22 pts LatAm (ex-Brazil)

-28 pts 9%

68%

23%

-6 pts Mexico

8%

-16 pts 49%

43%

-17 pts

-35 pts Improving

Staying The Same

Worsening

CORBIN ADVISORS 13

Going Forward

FX Headwinds = Category 5 Storm? Oil Patch Hits A Gusher!

Over The Next Six Months, What Are Your Expectations For The Following Economies?

Oil & Gas Markets

77%

19%

+47 pts

-22 pts

Housing/Resi Const.

54%

35%

+15 pts 46%

42%

12%

+29 pts

-27 pts 27%

58%

15%

+19 pts FX Headwinds

4%

11%

-11 pts

Non-resi Const.

Global Capex Spending

4%

-20 pts 31%

65%

-28 pts

+38 pts Improving

Staying The Same

Worsening



61% expect U.S. GDP to improve, supporting the case for green-shoot optimism and hopeful end to the Industrial recession



Maintaining a pace of moderate expansion, 61% expect Global PMI to stay the same



68% expect company input costs to worsen, highlighting concerns around inflation CORBIN ADVISORS 14

Outlook

Sentiment Improves As Subsector Favorites Shift

Predicted To Grow Faster Than GDP 63% 65%

Building Products

Materials

Predicted To Grow Slower Than GDP

18%

42%

55% 50%

45% 48%

Sep' 16

50% 38% 55% 33% 35%

Materials

55%

Water

43%

Transportation (Trucking)

37%

Non-Resi Const.

33%

Machinery

55%

Resi Const.

58%

Automotive

65%

Defense

68%

Agriculture

Water

22% 5% 17%

Sep '16

Dec' 16

Materials Back From The Dead With Largest Increase In Bullish Sentiment; Building Products Maintains Perch As Top Subsector

Dec '16

Ag Remains Most Bearish; Auto In Need Of Roadside Assistance While Water Sees Biggest Increase In Bearish Sentiment

CORBIN ADVISORS 15

About Corbin Advisors

Our passion is creating value for public companies.

From research-based insights to actionable strategies that differentiate our clients, Corbin unlocks thoughtful, positive change. We start by asking the right questions and end with providing actionable counsel that drives results.

Our proven methodology, proprietary analytics database, trusted reputation and in-depth experience generate unique insights. This marriage of research and rigor delivers comprehensive, actionable recommendations for internal and external value creation. We tailor strategies that enable high-impact decision making, secure maximum investor mindshare and ultimately, create longterm shareholder value.

If it’s Corbin, it’s Actionable.

“

Professional, analytical, creative

“

We are a catalyst – an investor relations (IR) advisory firm that partners with IR and C-suite executives to drive longterm shareholder value. We bring third-party objectivity as well as a best practice knowledge and collaborate with our clients to execute a sound, effective IR communications and engagement strategy.

and decisive…Corbin is everything I needed in a consulting partner.

- SVP, Investor & Corporate Communications, Small-cap Healthcare IT

CORBIN ADVISORS 16