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IF IT’S CORBIN, IT’S ACTIONABLE
2Q19 Earnings Primer Investor Sentiment Survey July 12, 2019 CORBINADVISORS.COM
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Inside The Buy-side® 2Q19 Earnings Primer
Issue Date: July 12, 2019
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
Survey Scope: 84 participants globally, comprising 64% buy side and 36% sell side; assets under management total ~$2.3 trillion Survey Timeframe: Jun. 14 – 28, 2019
2Q19
YTD 1
DJIA
2.6%
14.0%
NASDAQ
3.6%
20.7%
S&P 500
3.8%
17.3%
Russell 2000
1.7%
16.2%
1
By Type
As of 6’28’19
By Region
Generalist
By Investment Style
53%
Multi
27%
Cons. Discretionary
4%
Healthcare
4%
Industrials
4%
Materials
2%
REITs
2%
Technology
2%
Energy
1%
Financials
1%
Core Growth 18%
Core Value North America
26%
26%
56%
24%
GARP
17%
EMEA
Hedge Fund
12%
APAC
VC/Private Equity
12%
Deep Value
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5%
Inc. Value/Yield
2%
Other
2%
2
Word Cloud: Frequency of Occurrence Investor Feedback Indicates Increasingly Cautious Sentiment, as a Gradual Economic Slowdown is Expected; Trade War Concerns Loom Large
1Q 2019
2Q 2019
Key: Underlying Sentiment
Positive Neutral Negative CORBINADVISORS.COM CORBINADVISORS.COM
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Cautious Investor Sentiment on the Rise as Slowing Growth Materializes; Markets Priced for Perfection Despite Expectations for Deceleration Survey Findings Indicate Increased Recognition of Slowing Growth but Pace of Slowdown is Expected to be
#1 Measured; Few Calling for a Recession in the Next 12 Months
41% expect earnings to Decrease sequentially and 43% believe earnings will be Worse Than consensus, the highest level registered since Dec. 2015
All KPIs – Organic Growth, EPS, Margins and Cash Flow – are expected to Stay the Same or Worsen QoQ
62% note the U.S. economy is Losing Steam; still, 72% Do Not believe we will enter a recession in the next 12 months
78% anticipate 2019 U.S. GDP growth of ≤2.5%, in line with last quarter
80% note they are placing More Emphasis on balance sheet strength versus a year ago, up from 70% last quarter; debt paydown is cited as a top use of excess free cash by 52% of participants Sentiment More Cautious amid Slowdown and an Increase in Concerns Registered but Low Interest Rate Environment
#2 and Pockets of Strength Buoy Spirits
Neutral to Bearish to Bearish investor sentiment jumped to 53% from 33% QoQ, while management tone is also described as more cautious
Top unaided concerns center on trade wars, the political environment and a slowing economy; 65% express High concern with trade wars and 54% believe a favorable resolution to the U.S./China trade dispute over the next six months is only Somewhat likely
Views that China and Europe are slowing are more prevalent QoQ, while nearly half expect Global Capex and PMI to Worsen over the next 6 months; global investors and analysts remain downbeat on Auto and Semi
The low interest rate environment remains a bright spot and largely priced into the market; survey participants anticipate one to two more cuts, as 69% expect the Fed Funds Rate will be 2.0% - 2.25% at year-end
While concerns over Industrial production mount, Technology and Healthcare register the highest levels of bullish sentiment and the consumer is still seen as going strong
#3 Despite Recent Record Highs, Equities Considered Fairly Valued
56% describe U.S. equities as Fairly Valued, an increase from 51% last quarter; more value seen in Europe and Asia equities despite greater concerns around slowdown in those regions
While 58% report Holding or Rotating QoQ, Net Buyers have steadily increased over the past two quarters CORBINADVISORS.COM CORBINADVISORS.COM
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Amid Trade War Concerns and Signs of Slowing Growth, Investors Anticipate A Significantly Higher Number of Misses this Quarter Expectations Regarding 2Q19 Earnings Performance vs. Consensus
50%
49%
50%
Sep '18 Dec '18 Mar '19 Jun '19
32%
18%
Better Than
43%
Tariffs Europe
43%
37%
Unemployment Rate 21%
Trade Wars Global Economy
30%
20%
32%
18%
In Line
Buy-side Respondents Expecting Earnings to be Worse Than Consensus vs. 32% Last Quarter
Worse Than
41%
Expect Earnings to Decrease Sequentially vs. 50% Last Quarter
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Commentary on Earnings Expectations vs. Consensus Better Than – 20%
In Line – 37%
Worse Than – 43%
“Interest rates down, minimal unemployment, no government shutdown.”
“Steady economic environment, negative sentiment driven by tariff noise.” Buy Side,
Generalist, N. America
Buy Side, Generalist, N. America
Generalist, N. America
“Consumer and employment.” Buy Side,
“Corporate America keeps defying pessimistic predictions in the press.”
Generalist, N. America
“Timing and seasonality.” Sell Side, REIT,
N. America
Buy Side, Generalist, N. America
“Trade war and weather.” Buy Side, “Trade.” Buy Side, Generalist, N. America “Slowing top-line growth and margin pressure.” Buy Side, Generalist, N. America
“European and Chinese slowdown.” Buy Side, Generalist, N. America
“Economic numbers are declining around the world.” Buy Side, Multi, N. America
“1Q19 was soft and the lack of drivers leaves little room for upside.” Buy Side,
“Fuel prices.” Buy Side, Multi, Asia
Generalist, N. America
“Unclear picture, optimism/pessimism keep balance.” Buy Side, Generalist, N. America
“Similar to Q1 but falling behind plan for the year.” Buy Side, Multi, N. America “Negative read on tariffs.” Buy Side, Multi,
“Weaker export and investment.” Sell Side, Multi, Asia
“With the onset of monsoon, economic activities get adversely affected.” Sell Side, Multi, Asia
“Consumer data.” Sell Side, Consumer Discretionary, Europe
N. America
“Not a recession yet.” Buy Side, Financials, Europe
“Lack of solid recovery in China, weakening conditions in the U.S. and Europe, excess supply chain inventories.” Sell Side, Multi, N. America
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Organic Growth and FCF Largely Expected to Remain the Same QoQ; Views on Margins Slightly More Positive vs. Last Survey with More Expectations for Stabilization KPI Trends – Expectations Organic Growth 51% 44% 38% 35%
39% 21% 17% 11%
Improving
EPS
45% 44% 38%
49% 28% 19%
17%
Staying the Same
Operating Margins
26% 6%
Staying the Same
Worsening
Cash Flow 58%
46% 44% 36% 34%
45% 41% 38% 21%
16%
Improving
Worsening
36% 34% 30%
43%
55% 46%
30%
47%
46% 46% 38% 34%
20%22% 21%
42% 32% 33% 19%
11% 8%
Improving
Staying the Same
Worsening Sep '18
Dec '18
Improving Mar '19
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Staying the Same
Worsening
Jun '19 7
Topics of Interest for Upcoming Earnings Calls: Focus on Demand Trends and Action Plans to Position in a Slowing Growth Environment
1
Growth outlook, demand trends
2
Trade war impact
3
Efforts to position company for a slowdown, including capex levels
Out of N. America
Out of Europe
“Capex.” Buy Side, Generalist
“Impact of trade war.” Buy Side, Financials
“Business activity levels given weak freight data, slowing global PMIs, 2H outlook vs. prior guidance.” Buy Side, Generalist
“Margins.” Buy Side, Multi
“Signal on China demand and logistics planning.” Buy Side, Generalist
“Inflation.” Sell Side, Generalist “Stable earnings attitude.” Sell Side, Generalist
“China trade impacts, interest rate sensitivity, cash deployment.”
Out of Asia
“Ability/speed to accelerate or decelerate spending depending on demand outlook changes.” Buy Side, Generalist
“Economic impact.” Sell Side, Generalist
Buy Side, Generalist
“How they’re positioned for economic slowdown.” Buy Side, Generalist
“Trade war.” Sell Side, Multi “Easing out of liquidity, amicable Brexit and resolving of the trade conflict.” Sell Side, Multi
“Innovation and demand for their product or service going forward.” Buy Side, Generalist
“What companies’ prospects are in the next six months.” Buy Side,
Generalist
“Standardized operations.” Buy Side, Multi “Growth, destocking, decremental plans.” Sell Side, Multi “How they are getting stronger.” Sell Side, Multi CORBINADVISORS.COM CORBINADVISORS.COM
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Concern Levels with Trade Wars Spike; 54% Believe a Favorable Resolution to the U.S./China Trade Dispute Over the Next Six Months is Only Somewhat Likely Concern Levels Trade Wars
Tariff Impact
Sep '18
22%
14%
64%
Sep '18
23%
25%
52%
Dec '18
19%
18%
63%
Dec '18
22%
28%
50%
Mar '19
31%
34%
Jun '19 10% 25% No Concern
35%
Mar '19
65%
Jun '19
Moderate
High
Dec '18 Mar '19 Jun '19
21% 24% 32% 34% No Concern
35%
Sep '18
38%
38%
Dec '18
35% Moderate
29%
28% 54%
Moderate
High
Rising Interest Rates
44%
41%
17%
40%
No Concern
Rising Input Costs Sep '18
32%
27%
Mar '19
31%
35%
37% 27%
35% 76%
High
No Concern
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38% 20% 4%
82%
Jun '19
28%
11%7% Moderate
High
9
Downbeat Investor Sentiment Registers at the Highest Level Since Sep. 2015, as Management Tone Heard as Slightly More Cautious
Investor Sentiment
6%
28%
2% 29%
Management Tone
11%
Bullish Neutral to Bullish Neutral Neutral to Bearish
16% 33%
33% 28%
29% 34%
Bearish 34%
53% 45%
28%
34%
27% 26%
5%
8%
Mar '19
Jun '19
3%
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29%
1%
5%
Mar '19
Jun '19
10
Commentary on Sentiment Drivers Neutral to Bullish – 29% “We are starting to see concerns based on the current economic cycle.” Buy Side, Generalist, N. America
“The slowing down of the global economy.” Buy Side, Financials,
“Tariffs.” Buy Side, Generalist, N. America “I think there will be a China-U.S. trade deal and rate increases are off the table for now.” Buy Side, Generalist, N. America
“Unemployment is too low, leading to wage inflation, trucking is hard to find, trade issues have not flowed through to financial statements but they are coming, the economy is very susceptible to an external event right now.” Buy Side, Multi, N. America
“There is room for surprises.” Buy Side, Generalist, N. America
“U.S.-China trade war.” Sell Side, Multi, Asia
Neutral – 16%
“The lingering trade war is towards dampening business sentiment.” Sell Side, Multi, Asia
“Fed and trade.” Buy Side, Generalist, N. America
Europe
Bearish – 8%
Neutral to Bearish – 45% “Trade/tariff uncertainty in light of the Mexico threats make me cautious.” Buy Side, Generalist, N. America
“Geopolitical issues, President, widening U.S. deficit despite high employment rate, use of tariffs – these were dismissed as ridiculous years ago. Potential for armed conflict in Middle East (i.e., U.S. and Iran).” Buy Side, Multi, N. America
“Geopolitical tail risks combined with stretched fundamentals.” Buy Side, Generalist, N. America
“Expected re-acceleration has not materialized at the halfway point in the year. Very difficult binary trade war scenarios. Better to play it safe.” Buy Side, Generalist, N. America “Valuations and potential recession within 18 months.” Buy Side,
Generalist, N. America
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Top Unaided Concerns from around the Globe
1
Trade conflict
4
Monetary policy
7
Oil prices
2
Political environment
5
Middle East
8
Valuation
3
Slowing economy
6
China
9
Capex
Out of N. America
Out of Europe
“Escalating trade tensions, global capex, labor, inflation.”
“Global slowdown, Brexit, Auto sector.” Buy Side, Generalist
Buy Side, Generalist
“Trade as a non-economic policy tool, greater than anticipated slowdown in China, unpredictability of Trump.” Buy Side,
Generalist
“Slowing growth, tougher comps, the cycle.” Buy Side, Generalist Buy Side, Generalist
“Valuations, economy, exogenous shocks.” Buy Side, Generalist “Trade disputes, dollar too strong, Brexit.” Buy Side, Generalist
“Trade wars, Brexit, recession.” Sell Side, Multi “Growth, rates, sentiment.” Sell Side, Multi
“Trade wars.” Buy Side, Generalist “Trade war, too much debt, Italy.” Buy Side, Financials “Trade conflict, Europe weak economic growth, too positive outlook on low interest rates.” Buy Side, Multi
“U.S. war with China, U.S. war with Iran, Israel/Iran War.”
“U.S. politics, global politics.” Buy Side, Generalist
“Macro, inflation, interest.” Buy Side, Generalist
“Trade war, capex.” Buy Side, Multi “Politics, politics, politics.” Sell Side, Generalist
Out of Asia “Trade war, abnormality of weather, fuel prices.” Buy Side, Multi “Trade war, lower oil price & deflation, weak EU economy.” Sell Side, Multi
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While Concerns Continue to Mount, the Low Interest Rate Environment and Strong Consumer Serve Up Sunshine Most Optimistic Areas of Equity Investments/Macro Landscape (unaided)
1
Technology (SaaS, AI, 5G)
“Employment, consumer confidence and low inflation.” Buy Side, Generalist, N. America “Fed will lower rates, still no credible alternatives to equities.” Buy Side, Generalist, N. America
“Consumer Discretionary will continue to grow, pushed by low unemployment rate and increase in wages.” Buy Side, Generalist, N. America “Tech, falling rates.” Buy Side, Generalist, N. America
2
Lower interest rates
3
Employment
“Technology.” Buy Side, Multi, N. America “SaaS software spending, Healthcare.” Buy Side, Multi, N. America “Technology, Healthcare and Consumer.” Buy Side, Multi, N. America “Overall U.S. economic health.” Buy Side, Multi, N. America “Low interest rates.” Buy Side, Multi, Europe
4 5
Consumer confidence
“Strong labor market.” Sell Side, Generalist, Asia “Reversion to mean in undervalued Industrials, which have been left behind in the recent run.” Sell Side, Generalist, Australia
Healthcare
“Combinations of fiscal and monetary stimulus have been taken by the major economies to positively drive business sentiment and thereby equity as an investment tool.” Sell Side, Multi, Asia
“5G, SaaS, life science and AI.” Sell Side, IT, N. America
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Recession Concerns Not Identified but Investors Overwhelmingly View the Global Economy as Losing Steam, Particularly in Europe and China Views on the Economy Following 1Q19 Earnings
Areas of Economic Slowdown (unaided)
62%
Regions 27%
6% Heading into Recession
Losing Steam
72%
Holding Steady
1%
4%
Gaining Steam
No Recession Concerns
End Markets
60% | Europe
29% | Auto
33% | China
21% | Industrial
31% | U.S.
18% | Semi
10% | Asia
11% | Construction
Do Not Believe We Will Enter a Recession in the Next 12 Months 2019 U.S. GDP Prediction 54% 47%
41%
37% 30% 28%
18%
14% 6%
2.0% or Below
2.5%
3%
3.0% Dec' 18
Mar '19
4% 3.5%
Jun '19
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4%
2%
8%
4%
I Do Not Pay Attention to GDP
14
A Common Theme This Survey: Nearly All Regions Anticipated to Stay the Same over the Next Six Months, with the Exception of China and Europe; Emerging Markets See Some Strength Global Economy Expectations over the Next Six Months India
45%
48%
7%
+8 pts
-5 pts
Southeast Asia
36%
42%
22%
+1 pt
+6 pts
Brazil
35%
37%
28%
-7 pts
+5 pts
Japan
25%
57%
18%
+7 pts China
+2 pts 22%
28%
50%
-9 pts Mexico
+14 pts
17%
49%
34%
-11 pts U.S.
+19 pts
15%
46%
39%
-9 pts Eurozone
15%
+4 pts 37%
48%
+3 pts Latin America
-8 pts
14%
64%
22%
-8 pts
-3 pts Improving
Staying the Same CORBINADVISORS.COM CORBINADVISORS.COM
Worsening
15
Expectations Over the Next Six Months: Global Capex, Global PMI and Consumer Confidence Improving
Staying the Same
Worsening
Global Capex 34% 44% 22% Sep '18
“Improving: Assuming trade conflict eases.” Buy Side, Generalist, N. America
19%
17%
40%
40%
37%
41%
41%
46%
19%
Dec '18
Mar '19
Jun '19
“Staying the Same: Until the Trump administration signals its satisfaction with trade deals, the rest of the world is uneasy.” Buy Side, Generalist, N. America “Worsening: Trade uncertainty.” Buy Side, Generalist, N. America “Worsening: Trade war.” Sell Side, Multi, Asia
Global PMI 14% 58% 28% Sep '18
12%
13%
14%
38%
42%
37%
“Worsening: China softening, trade war.” Buy Side, Generalist, N. America 50%
45%
49%
Dec '18
Mar '19
Jun '19
11%
15%
14%
42%
38%
54%
43%
48%
Dec '18
Mar '19
Jun '19
35%
51% 27% Sep '18
“Worsening: Already bad in most countries.” Buy Side, Multi, N. America
“Staying the Same: Should be fine until the labor market worsens.” Buy Side,
Consumer Confidence 22%
“Staying the Same: The lack of demand and efficiencies in commodity extraction leaves no room for price increases.” Buy Side, Generalist, N. America
Generalist, N. America
“Staying the Same: Sentiment and Central bank stimulus will balance each other.” Buy Side, Generalist, N. America “Worsening: Prices will increase from tariff impact.” Buy Side, Generalist, N. America
“Worsening: Will follow market and economy.” Buy Side, Multi, N. America CORBINADVISORS.COM CORBINADVISORS.COM
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Expectations Over the Next Six Months: O&G Marks, Resi and Non-Resi Improving
Staying the Same
Worsening
Oil & Gas Markets 47% 43% 10% Sep '18
“Improving: Middle East tensions should help oil prices.” Buy Side, Generalist, N. America
36%
26%
31%
38%
66%
43%
26% Dec '18
8% Mar '19
26% Jun '19
12% 34%
53% 25% Sep '18
54% Dec '18
49%
Generalist, N. America
“Staying the Same: There is oversupply regardless of political concerns.” Buy Side, Generalist, N. America
“Improving: Macro need for millennial housing is building, interest rates lowering.”
27%
35%
39%
32%
34%
33%
Mar '19
Jun '19
Buy Side, Generalist, N. America
“Improving: Lower rates may drive home demand.” Buy Side, Generalist,
N. America
“Worsening: Things are already slowing.” Buy Side, Multi, N. America “Worsening: Tight mortgage measures.” Sell Side, Multi, Asia “Staying the Same: There are still many projects ongoing.” Buy Side, Generalist,
Non-Resi Construction 25%
“Staying the Same: U.S. production offsetting Middle East concerns.” Buy Side,
“Improving: Low rates.” Buy Side, Generalist, N. America
Resi Construction 22%
“Improving: Assuming trade conflict eases.” Buy Side, Generalist, N. America
14%
18%
10%
47%
50%
59%
N. America
“Staying the Same: Public infrastructure.” Sell Side, Multi, Asia “Worsening: Less desire for businesses to take on new risks.” Buy Side, Generalist, N. America
26%
39%
32%
31%
Sep '18
Dec '18
Mar '19
Jun '19
“Worsening: Why would companies increase capex in light of so much uncertainty?” Buy Side, Multi, N. America CORBINADVISORS.COM CORBINADVISORS.COM
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U.S. Equities Still Generally Viewed as Fairly Valued, with Limited Concerns on Brexit or Rising Interest Rates; Net Buyers Increase QoQ QoQ Investment Trends
Global Equity Valuation Classification
43%
1% U.S. Under
69%
24% 11%
56%
70%
31%
45%
45%
41%
42%
22%
23%
32%
33%
Europe
Asia
Fairly
16%
32%
25% 14%
28%27%26%
17% 5%
Net Buyer
Over
Net Seller
Holding
Dec '18
Rotating
Mar '19
1% 1%
Liquidating
Jun '19
QoQ Portfolio Cash Holding Europe Investors Who Consider Europe Equities Undervalued
50%
46%
44% 43% 33%
Are Not Concerned or Only Somewhat Concerned about Brexit
37% 10% 13%
Expect the Fed Funds Rate Will be Between 2.0% and 2.25% at 2019 Year-end
Increase
Remain Steady Dec '18
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4%
Decrease Mar '19
7% 6% 7% Do Not Hold Cash
Jun '19 18
Technology and Healthcare Continue to Set the Pace, While Bears Swarm Around Materials, Energy and Industrials
51%
Technology 42%
Healthcare
62%
Financials
24%
Comm. Services
34% 26%
Industrials
36%
Cons. Disc.
21% 26%
Building Products
Industrials
25% 21%
REITs
21% 20%
Utilities
21% 20%
20% Mar '19
28% Jun '19
28%
Mar '19
Healthcare, Tech and Comm. Services See the Most Significant Increases in Positive Sentiment
34%
30%
Cons. Disc.
Financials
42%
34%
19%
Energy
27% 31%
Cons. Staples
18%
Materials
56%
40% 39%
Biotech
36%
37% 48%
Jun '19
REITs Once Again See their Fewest Bears in Over Three Years, While Building Products See the Largest Decrease in Negative Sentiment QoQ
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Debt Reduction Identified as the Top Use of Cash, with 80% Asserting They are Placing More Emphasis on Balance Sheet Strength vs. One Year Ago; Preferred Debt Levels Now 2.0x or Less Preferred Uses of Cash
In Descending Order of Top Two Preferences 46%
52%
53%
45% 29%
Debt Paydown
Reinvestment
39%
34% 21%
Dividend Growth
26%
26%
Buybacks
Jun '16
24%
M&A
19%
Dry Powder
Jun '19
Preferred Net Debt-to-EBITDA Levels 36%
32% 22% 16%
32%
27% 28% 18% 18%
12%
<2.0x
11%
9%
2.0x
2.5x 2016
3.0x 2018
7%
2%
5%
>3.0x
11%
10% 4%
No Ideal Level
Jun '19
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