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IF IT’S CORBIN, IT’S ACTIONABLE
1Q18 Earnings Primer Investor Sentiment Survey April 5, 2018 CORBINADVISORS.COM
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Inside The Buy-sideÂŽ 1Q18 Earnings Primer
Issue Date: April 5, 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.
Market Performance YTD*
YoY
(2.9%)
4.6%
0.8%
9.8%
S&P 500
(2.0%)
5.5%
Russell 2000
(1.3%)
2.1%
DJIA NASDAQ
Survey Scope: 75 participants globally, comprising 65% buy side and 35% sell side; assets under management total ~$2.2 trillion
* As of March 29, 2018
Survey Timeframe: March 5 – 26, 2018 By Type
By Region
By Investment Style
1
Multi
9%
N. America
Financials
8%
Europe
IT
3%
Materials
3%
Other
52% 36%
20%
GARP
12%
14%
Industrials
32%
Core Growth
57%
Generalist
Asia Pacific
Hedge Fund
7%
VC/Private Equity
7%
Income Value/Yield
4%
Sector Specific
4%
Other
6%
18%
Core Value
8%
1 For multiple coverage, sectors include: Cons. Disc.; Cons. Stap.; Energy; REITs; Telecom; and Utilities
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Word Cloud: Frequency of Occurrence
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Key Findings: Strong Economic Growth and Earnings Momentum Continue but Trump-induced Trade War Fears Come Home to Roost #1
Will a Confluence of Concerns, Including Trade War Reality, Reverse Global Economic Momentum? Management Tone and Outlooks on Upcoming Earnings Calls Will Be Telling
Inflation, rising interest rates and broad-based labor shortages are viewed as detrimental to economic expansion
while tax reform is expected to contribute 0.25 – 0.50% to 2018 U.S. GDP Ahead of Trump’s tariff announcement and China’s retaliation, trade wars were at the forefront of surveyed investors’
minds with 74% expressing Moderate to High concern about the potential to derail growth momentum Nonetheless, on the heels of last quarter’s results, more than half describe their confidence level in the global
economy as Relatively High or High
#2
Back to the Regularly Scheduled Program: 1Q18 Performance Expected to Be Strong; Tax Reform Expected to Benefit “Near-Term” Results
90% describe 2018 guidance outlooks as In Line to Better Than expected, further bolstering optimism about
continued growth and earnings momentum 60% expect sequential earnings improvement, while more than 90% forecast results will be In Line to Better Than
consensus Organic growth, EPS and cash flow still largely expected to improve QoQ but at slightly muted levels; margin
outlooks temper somewhat amid rising input costs Despite identified concerns, investor sentiment and perceived upbeat management tone registered only slightly
below last quarter’s highest positive levels and outright executive optimism saw an uptick Tax reform cited as the number one driver of bullish sentiment heading into 1Q18 earnings season
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A Lookback: Prior Quarter Came in Strong as Expected; Continued Positive Outlook Driven by Management Tone Despite Inflation Concerns Top Takeaways from 4Q Earnings Calls
1 2
“Good attention to spending and cost control; New tax law; No recession in sight.” Buy Side, Generalist, N. America
Positive Outlooks
“Working in a strong economy; Little confidence in D.C.” Buy Side,
Rising Costs, Wage Pressure
“Taxes providing a boost for 2018 EPS and cash flow; Management outlooks are generally favorable for business; Clarity beyond late 2018 is not that good.” Buy Side, Multi, N. America
Generalist, N. America
“Cash flow strength from tax reform; Margin headwinds from inflation; Duration of the cycle.” Buy Side, Industrials, N. America
3
“Strong capital return in 2018; Credit quality is something to monitor.”
Favorable Macro Environment
Buy Side, Financials, N. America
“Tax cuts to drive capex and buybacks; Bonus and wage increases; Commodity price inflation.” Buy Side, Generalist, Europe
2018 Full-year Guidance Outlooks Vs. Expectations
Tax Reform Economic Growth
Better Than
“Tax reform more beneficial than expected for several; Economic momentum is still only improving gradually; CEO confidence is high and this should lead to more M&A and capex.” Sell Side, Financials, N.
63%
America
Macro
27%
In Line
“Mainly low-quality beats and raises, such as through share buybacks, tax reform.” Buy Side, Healthcare, Europe
10%
“Environment is positive; We continue to ameliorate structures; We will increase capex.” Sell Side, Generalist, Europe
Worse Than
“Prices seem to have bottomed out; Diversification wasn’t as beneficial as hoped; Companies with captive power plants will continue to fare better.” Sell Side, Materials, Asia
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Global Growth Momentum and U.S. Tax Reform Drive Continued Strong Expectations Expectations Regarding 1Q18 Earnings Performance Relative to Consensus
Tax Reform Consumer Confidence
GDP Growth Tax Reform
Mar '17
52% 49% 50% 48%
Jun '17 Sep '17 Dec '17
44% 36%
39%
43% 43%
38%
Mar '18 18%
15%
11% 5%
Better Than
60%
Expect Sequential Improvement
In Line
91%
vs. 72% Last Quarter
9%
Worse Than
Expect In Line to Better Than Consensus Results vs. 95% Last Quarter
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KPI Improvement Largely Still Expected but Enthusiasm Sees Slight Pullback Key Performance Indicators Expectations Versus Last Quarter Organic Growth
EPS Growth
61% 54% 46%46%
41%
63% 59%
46% 35%
29% 13%
Improving
68% 68%
Staying the Same
30% 27%
17% 8%
17% 7%
4%
Worsening
Improving
Cash Flow 56%
62% 52%
Staying the Same
59% 50% 35%
28% 12% 15%
Staying the Same
6% Worsening
40% 30%
53% 47%
29%
24%
15%
15%
3% Improving
15%
14%
Operating Margins
57% 32% 33% 35%
26%
Worsening
Jun '17
Sep '17
Improving
Dec '17
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Staying the Same
11% 7%
Worsening
Mar '18 7
Commentary on Earnings Expectations Vs. Consensus
Better Than – 43%
In Line – 48%
Worse Than – 9%
“GDP growth and tax cuts.” Buy Side, Generalist, N. America
“Weak USD, new tax laws, strong U.S. consumer.” Buy Side, Generalist, N. America
“No underlying gain in earnings; the market is driven by animal spirits from bad U.S. tax policy.” Buy Side, Multi, N. America
“Momentum for our companies is very good and we expect that to continue.” Buy Side, Generalist, N. America “Weaker dollar and higher tax benefits.” Buy Side, Multi, N. America “Strong global growth and low inflation pressure, especially no wage pressure.” Buy Side, Generalist, Europe “Tax cuts and improving economy.” Sell Side, Multi, N. America “Economic activity is very, very strong.” Sell Side, Information Technology, N. America “Strong real estate market.” Sell Side, REIT, Europe “Oil price and exports.” Sell Side, Multi, Asia
“Tax rate changes and positive expectations for GDP.” Buy Side, Multi, N. America
“Leading indicators.” Buy Side, Generalist, Europe
“Earnings seem to remain steady or going up.” Buy Side, Multi, N. America
“Index for Industrial Production (IIP) and GDP growth.” Buy Side, Generalist, Asia
“It’s a mixed bag on expectations; it depends if a company took a repatriated tax hit in 4Q.” Sell Side, Industrials, N. America
“Trade data.” Sell Side, Multi, Europe
“Weaker dollar is helping global large caps but is partially offset by trade fears.” Sell Side, Energy, N. America
“Anticipated decline in sales.” Sell Side, Energy, Asia
“Overheated expectations.” Sell Side, Information Technology, N. America
“Better environment and improved company structures.” Sell Side, Generalist, Europe “Higher fuel prices and increasing rivalry between industry players.” Sell Side, Materials, Asia
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Topics of Interest for 1Q18 Earnings Calls
1
Economic Outlook
2
Path to Expand Margins
3
Sales Momentum
Out of N. America
Out of Europe
“Revenue growth and expenses.” Buy Side, Generalist, N. America
“Guidance.” Buy Side, Generalist, Europe
“Mid-range outlook.” Buy Side, Generalist, N. America
“Tax cut and investment spending.” Buy Side, Generalist, Europe
“How they intend to expand margins and the top line.” Buy Side, Multi, N. America
“Margins.” Buy Side, Multi, N. America
“Market outlook.” Buy Side, Multi, Europe “Impact of technology and digitalization.” Buy Side, Multi, Europe
“U.S. macro demand.” Buy Side, Industrials, N. America
“General environment and strategic options.” Sell Side,
“Inflation and bank credit quality.” Buy Side, Financials, N. America
Generalist, Europe
“Tax impact and economic outlook.” Sell Side, Multi, N. America
“Margins to improve or not?” Sell Side, Financials, Europe
“Backup plans in case of real war.” Sell Side, Industrials, N. America
“Sales momentum.” Sell Side, Multi, Europe
“Impact of economic strength.” Sell Side, Information Technology, N.
Out of Asia
America
“Long-term outlook on the broader economy and whether individual companies’ fortunes depend on positive, underlying, long-term economic activity.” Sell Side, Information Technology, N. America “Outlook for the U.S. economy.” Sell Side, Financials, N. America “Input costs.” Sell Side, Energy, N. America
“Sector outlook.” Buy Side, Generalist, Asia “Hedges against possible changes in the global trade game, rising inflation and possibly slower consumer growth.” Sell Side, Materials, Asia
“Sales momentum, state of the balance sheet and cash flows.” Sell Side, Energy, Asia CORBINADVISORS.COM CORBINADVISORS.COM
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Investor Sentiment and Management Tone Remain Elevated and Near Highest Levels in Four Years Due to Strengthening Global Growth…Will Trade Wars Erase Gains?
Investor Sentiment
71%
23%
22%
Management Tone
66%
80%
75% 31%
27%
Bullish Neutral to Bullish 48%
44%
Neutral Neutral to Bearish
49%
48%
Bearish 12%
12% 15%
15%
2%
7%
4% 1%
Dec '17
Mar '18
Dec '17
15%
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22% 3% Mar '18
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Commentary on Sentiment Drivers “Perhaps not as positive as I would have expected post tax reform but still reasonably upbeat.” Sell Side, Financials, N.
Bullish – 22% “Unit volume strength and a little inflation.” Buy Side, Generalist, N. America
America
“Conversations with management.” Sell Side, Generalist, Europe
“Taxes.” Buy Side, Multi, N. America
“Exports.” Sell Side, Multi, Asia
“Market technicals.” Buy Side, Financials, N. America
Neutral to Bearish – 15%
“This year’s correction has been excessive.” Buy Side, Multi, Europe
“Tax cuts, an improving economy.” Sell Side, Multi, N. America “Underlying economic activity and positive trends in my segments.” Sell Side, Information Technology, N. America
“While macro and bottom-up data points are supportive of improving fundamentals, I worry about potential air pockets in growth in 2H17, especially as commodities have pulled back and management teams await policy before making significant capital investment decisions.” Buy Side, Generalist, N. America “Not enough growth in the economy to sustain valuations.” Sell
“Strong underlying demand along with delayed capacity expansions.” Sell Side, Materials, Asia
Side, Generalist, N. America
“Trump’s plans are stalling in Congress and the market is too bullish on its success.” Sell Side, Tech, Europe
Neutral to Bullish – 44% “Worried about inflation and margins. Every management team we meet with discusses costs, especially labor.” Buy Side,
Neutral to Bearish – 7% “Trade wars, rising interest rates and slowing housing.” Buy Side,
Generalist, N. America
Generalist, N. America
“This is the most hated bull market ever. Valuations are getting stretched.” Buy Side, Generalist, N. America Side, Multi, N. America
“The broader stock market is overvalued and technically overbought vs. our models. Healthcare (mainly Biotech, Spec Pharma & Generics and some HC services groups) stand out as being significantly undervalued.” Buy Side, Healthcare, Europe
“Again, global growth outlook and high guidance.” Buy Side,
“Increasing interest rates, tax rules.” Sell Side, REIT, Europe
“Listening to analysts and senior execs when interviewed.” Buy
Generalist, Europe * Bearish (7%)
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Tax Reform Expected to Contribute 0.25 – 0.50% to 2018 U.S. GDP Growth 0 – 0.25% “Unintended consequences and not necessary.” Buy Side, Generalist, N.
Tax Reform Impact on 2018 U.S. GDP Growth
America
“One-time gasoline on the fire and it hurts the deficit hugely.” Buy Side, Multi, N. America
47%
0.25 – 0.50% “Borrowing from the future; rates will go back up.” Buy Side, Generalist, N. America
“Corporate tax rates had to be brought closer to international norms and the effect on fiscal [policy] is bad.” Buy Side, Generalist, N. America
28%
“Too much stimulus at this point in the cycle.” Buy Side, Generalist,
19%
Europe
“Short-term sugar pill but will do significant, long-term damage by increasing the deficit and will hurt U.S. long-term economic security.” Sell Side, Information Technology, N. America
6%
0.50 – 0.75% “Positive for companies’ EPS.” Buy Side, Generalist, Europe
0 - 0.25%
0.25 - 0.50% 0.50 - 0.75%
>0.75%
“Positive for economy but bearish for bonds.” Sell Side, Energy, N. America
>0.75% “Very, very positive.” Sell Side, Information Technology, N. America
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Confidence in the Economy Moderate to Relatively High with the Peak Anticipated in 2019; Trade Wars Largest Risk to Growth Momentum How Much Confidence Do You Have in the Economy Following the 4Q Earnings Cycle?
Where Are We in the Economic Cycle? 55% 48% 42%
Tax Reform Jobs Growth 41%
2%
5%
No Confidence
Relatively Low
31%
41%
11% Moderate
Relatively High
High
17% 13% 0% 1% 0% Early
6% 5% 5% Early-toMid Sep '17
How Much Concern Do You Have About The Following in Terms of Their Impact on the Generally Positive Growth Momentum Companies Are Experiencing? 37%
34%
22%
40%
36%
26%
23%
30%
Trade Wars
Rising Input Costs
Rising Interest Rates
No Concern
74%
Moderate
36%
Mid Dec '17
Late
Mar '18
42% 19%
17%
49% Volatile FX
Mid-toLate
When Do You Think We Will Peak?
15%
52%
30% 26% 21%
2018
2019
2020
10%
12%
2021
2022
High
Expect YE 2018 Fed Funds Rate to be 2.0% or 2.25% CORBINADVISORS.COM CORBINADVISORS.COM
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Top Concerns from around the Globe
1
Trade Wars
2
Interest Rate Hikes
Out of N. America
3
Inflation
Out of Europe
“Rates; Inflation; Geopolitics.” Buy Side, Generalist, N. America
“China’s growth; Fall of the USD; Trade war.” Buy Side, Generalist, Europe
“Rising rates due to inflation; Global economic deceleration; Federal budget deficit and debt levels in a rising rate environment.” Buy Side, Generalist, N. America
Generalist, Europe
“War; Federal Reserve missteps; Political turmoil continues in mature Europe.” Buy Side, Generalist, N. America
“Fast and too high of an interest rate rise from Fed; Surprising rise in inflation; Trade and currency war.” Buy
“Trade war; Valuation; Debt levels.” Buy Side, Generalist, N. America
“Global trade wars; Spike in commodity costs; Rising interest rates.” Buy Side, Generalist, N. America “Trade wars; Interest rates; Irrational exuberance.” Buy Side, Multi, N. America
“U.S. tax and trade policy; Lack of GAAP earnings; Brexit.” Buy Side, Multi, N. America
“Trade wars; Global threat environment; Materials costs.” Buy
“Instability in Washington; Trade wars.” Buy Side,
Side, Generalist, Europe
“Trade wars are here to stay; China’s financial and housing bubbles; Brexit.” Buy Side, Multi, Europe “Trump starts a war with North Korea; Trump keeps on heading towards a trade war with the EU.” Buy Side, Healthcare, Europe
Out of Asia “Global Trade War triggering protectionist policies; Chinese demand slowing down due to credit slowdown; Rising tensions in the Middle East leading to higher oil prices.” Sell Side, Materials, Asia
Side, Industrials, N. America
“U.S. equity market valuation; U.S. interest rates and yield curve; Inflation.” Buy Side, Financials, N. America
“Fiscal deficit; Mutual fund redemption.” Sell Side, Financials, Asia
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Commentary on Confidence in the Economy
Moderate – 41%
Relatively High to High – 52%
“We continue moving along moderately but tax law could heat up the economy faster.” Buy Side, Generalist, N.
“Jobs and wages.” Buy Side, Generalist, N. America
America
“It’s been a long time since we’ve enjoyed even average economic growth and the time may have come.” Buy Side,
“Synchronized global growth, like everything else, tempered by concerns over U.S. trade policy.” Buy Side,
Generalist, N. America
Multi, N. America
“Taxes.” Buy Side, Multi, N. America
“General commentary on the markets.” Buy Side, Multi, N.
“Tailwinds will have several quarters of runway.” Buy Side,
America
Industrials, N. America
“Global growth.” Buy Side, Generalist, Europe
“Jobs growth, low unemployment and interest rates are still historically low.” Buy Side, Financials, N. America
“Current GDP growth is greater than potential growth and the world unemployment rate is close to a record low.” Buy Side, Generalist, Europe
“Tax cuts drive deficit and debt.” Buy Side, Generalist,
“Strong growth and tax reform.” Sell Side, Energy, N.
Europe
America
“The foundations of growth are still strong.” Buy Side, Multi, Europe
Materials, Asia
“High consumer sentiment.” Buy Side, Generalist, Europe “Tax cuts; deregulation.” Sell Side, Information Technology, N. America
“All companies have restarted their growth engines.” Sell
* Relatively Low to Low (7%)
“Conversations with management.” Sell Side, Generalist, Europe
“There are widening twin deficits that cause concern; however, inflation is in check with substantial government spending expected in the run-up to elections.” Sell Side,
Side, Financials, Asia
“Still not firing on all cylinders but management confidence is pretty good.” Sell Side, Financials, N. America
“Very positive tailwind from 2017.” Sell Side, Financials, Europe
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Concerns Dampen Enthusiasm but Outlook for Growth Still Generally Positive Global Economy Expectations Over the Next Six Months Eurozone
61%
29%
10%
-13 pts
+6 pts
U.S.
59%
27%
14%
-8 pts
+11 pts
India
49%
39%
12%
-2 pts
+4 pts
Brazil
48%
30%
22%
-6 pts
+7 pts
Southeast Asia
47%
46%
7%
-4 pts
+2 pts
LatAm (ex-Brazil)
35%
43%
22%
-7 pts
Japan
+11 pts
28%
58%
14%
-16 pts
Mexico
+9 pts
25%
47%
28%
-13 pts
China
+12 pts
23%
54%
23%
-1 pt
-5 pts
Improving
Staying The Same CORBINADVISORS.COM CORBINADVISORS.COM
Worsening
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Markets Crying Uncle! More Expected a Contraction but Still Held Steady or Bought U.S. Equity Valuation Classification Mar '17 3%
30%
QoQ Investment Trends
67% 43%
Jun '17 8%
45%
Sep '17 8%
47%
48%
36%
34% 32% 31%
44%
30% 26%
Dec '17 5%
39%
56%
Mar '18 1%
42%
57%
Under
Fairly
18%18% 14%
Over
8%
6%
2018 U.S. Equity Valuation Expectations
Dec '17
40%
38%
22%
2% 1% 1%
Net Buyer
Net Seller Sep '17
Mar '18
23%
Expand
42%
Remain Flat
Holding
Dec '17
Rotating
Liquidating
Mar '18
35%
Contract CORBINADVISORS.COM CORBINADVISORS.COM
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Europe, Asia Equities Seen as More Fairly Valued and Generally Expected to Remain Flat Europe Equity Valuation Classification
Dec '17
26%
Mar '18
24%
62%
Under
Dec '17
12%
50%
Mar '18
26%
Fairly
Over
2018 Europe Equity Valuation Expectations
Dec '17
Mar '18
54%
37%
Expand
35%
44%
Remain Flat
Asia Equity Valuation Classification
24%
52%
22%
Under
Fairly
Over
2018 Asia Equity Valuation Expectations
Mar '18
19%
9%
26%
Dec '17
11%
67%
Contract
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52%
30%
Expand
39%
55%
Remain Flat
9%
15%
Contract
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Technology Dethrones Financials; Utilities and REITs Continue to Drag
56% 61%
Technology
73%
Financials
47% 47%
Utilities
47%
REITs
38%
58%
Cons. Disc.
31% 18% 24%
Building Products
41% 34%
Energy
38%
Telecom
31% 34%
14%
Energy
22%
44%
Healthcare
34% 42%
Biotechnology
Industrials
32% 41%
Industrials
22% 6% 21% 29%
Cons. Staples
29% Dec '17
32%
Cons. Disc.
Mar '18
21% Dec '17
Ahead of Tech Sell-off, Sector Expected to Outperform while Industrials, Seen as a Top Beneficiary of Tax Reform, See Pullback in Bulls
Mar '18
Bears Remain Committed to Utilities and REITs; Industrials Get a Double-heaping of Bear
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CEO-to-Worker Compensation Ratios: Little Impact on Investment Decisions1
If CEO-to-Worker Ratios Will Influence Your Investment Decision, Do You Have a Threshold Ratio? How Much Influence Will CEO-to-Worker Compensation Ratios Have on Your Investment Decisions?
10%
62% 90%
Yes
29%
No
If a Company Is Over Your Threshold, Would it Prompt You to Sell? 6%
No Influence
Relatively Low
3% Moderate/ Some
0%
Relatively High
13%
High
87%
1
Yes
n = 65 CORBINADVISORS.COM CORBINADVISORS.COM
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ABOUT US
CORBIN ADVISORS CORBINADVISORS.COM
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
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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 CORBINADVISORS.COM
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