3q16 industrial sentiment survey final by Corbin Advisors

Industrial Sentiment Survey 3Q16 Earnings Primer October 13, 2016

www.corbinperception.com

INDUSTRIAL SENTIMENT SURVEY

ISSUE

DATE:

OCTOBER 13, 2016

3Q EARNINGS PRIMER • We survey institutional investors and analysts quarterly to gauge and track sentiment on topics pertaining to the earnings season, business climate, global economy and market drivers

Market Performance

Inside The Buy-side®

• Survey scope: 30 investors and analysts; buy-side firms manage $502.1B in assets and have $49.4B invested in Industrials

3Q16

OneOne-Year

S&P 500

3.3%

12.9%

S&P Industrial

3.6%

16.9%

As of 9’30’16

• Survey timeframe: September 9 to October 11, 2016 Region

Sector Focus

Role

N. America

13%

Europe

47%

53%

60% 20%

Asia Pacific

17%

87% Buy Side

Sell Side

www.corbinperception.com

Industrials

Generalist

Latin America

Inside The Buy-sideÂŽ

WORD CLOUD: FREQUENCY OF OCCURRENCE

Note: Almost all comments were communicated in a negative context www.corbinperception.com

KEY FINDINGS: STABILIZATION LARGELY EXPECTED THIS QUARTER BUT FUNDAMENTAL CONCERNS LOOM LARGE

Inside The Buy-side®

Neutral Sentiment En Vogue Though Investors Describe Their Stance As More Cautious Relative To What They Are Hearing From Management; Earnings Largely Expected To “Meet”

•

Trends in executive tone have warmed somewhat with nearly half of investors and analysts describing management as neutral and fewer as bearish this quarter

•

Investor sentiment is tightening – no outright bears or bulls BUT those asserting they are neutral or neutral to bearish have nearly doubled QoQ

•

58% expect this quarter’s earnings to be in line with consensus; fewer are expecting misses

•

3Q KPIs are largely predicted to be in line with 2Q results; notably, those expecting an improvement in revenue ticked up while fewer expect an improvement in margins QoQ

Sentiment On Global Economies Shifting While Mixed Sentiment On China’s Health Makes It A Wildcard

•

While views that China’s economy will improve in the near-term increased this quarter, China topped unaided concerns (our separate channel checks suggest Asia-based investors are concerned about a “hard landing”)

•

Investors and analysts report being more positive on several emerging market economies while those expecting the Eurozone to worsen declined significantly

Industrial Valuations Seen As Frothy While Certain Shifts In Subsector Sentiment Are Notable

•

92% believe Industrial valuations are fairly or over valued; those describing their investment activity as “holding” climbed QoQ

•

Ag sees largest spike in bearish sentiment while concerns around Non-resi Construction are pronounced, a major erosion in sentiment QoQ, and views on O&G markets deteriorate somewhat www.corbinperception.com

EARNINGS EXPECTED TO MEET CONSENSUS; FEWER MISSES PREDICTED IN THE POST-1Q RESET…“NEW NORMAL” Expectations Regarding 3Q Earnings Performance Relative To Consensus 58% 50% 50%

Dec '15

Inside The Buy-side®

Mar '16 Sep '16

35% 34%

31%

Jun '16 13% 15% 16%

21%

Better Than

56%

21%

In Line

Worse Than

Better Than “3Q trends seem in-line with 2Q exit rate across most end markets, with Oil & Gas capex seemingly the only outlier, which continued to decelerate.” Buy Side | N.A. “Good momentum continuing from 2Q16.” Sell Side | Europe “All forex.” Sell Side | Europe “Ongoing operating leverage of companies will continue to drive results, upside for further price recovery of materials.” Sell Side | Europe www.corbinperception.com

3Q KPIS LARGELY PREDICTED TO STABILIZE THOUGH VIEWS ON EPS AND MARGIN IMPROVEMENT REVERSED COURSE Revenue

EPS

72%

53% 46%

37%

41%

40%

48%

45%

40% 29%

Inside The Buy-sideÂ®

30%

10%

15%

19%

Improving

35%

23%

25% 16%

18%

Staying the Same

Worsening

Improving

Staying the Same

Cash Flow

44% 46%

40%

29%

46%

Worsening

36%

25%

49% 38%

36% 37%

35% 25% 23%

20%

19%

Margins

58% 37% 38%

40%

37% 31% 31%

30%

35%

31%

23%

15% 4%

Improving

Staying the Same

Worsening

Dec '15 www.corbinperception.com

Mar '16

Improving

Jun '16

Staying the Same

Worsening

Sep '16 Follow us @CorbinResearch

THINGS THAT MAKE US GO HMMMMM…MANAGEMENT TONE CHARACTERIZED AS “NEUTRAL” AND LESS DOWNBEAT QOQ

Inside The Buy-side®

Jun ‘16

Sep ’16 QoQ Notable Changes

36%

37%

38%

-20 pts

27%

+16 pts

35%

+10 pts

58% Bullish Cautiously Optimistic Neutral

33% 11%

Neutral to Bearish

48%

+15 pts

Bearish 28%

Management Tone www.corbinperception.com

25% 6%

11%

Investor Sentiment

Management Tone

-17 pts

-6 pts

Investor Sentiment Follow us @CorbinResearch

STRAIGHT FROM THE BUY / SELL SIDE: ON SENTIMENT Bullish “Forex.” Sell Side | Europe “Restructuring during the last few years has prepared companies and increased operating leverage.” Sell Side | Europe

Inside The Buy-side®

“Belief in management.” Sell Side | Europe

Neutral “Slowing GDP worldwide.” Sell Side | N.A. “End market trends.” Buy Side | N.A. “Sector rotation out of defensive dividend stocks into cyclicals.” Buy Side | N.A.

Bearish “ISM, short cycle orders, and declining plateau in autos.” Buy Side | N.A. “Lack

of productivity improvement.” Buy Side | N.A.

www.corbinperception.com

INVESTORS REVERT TO HOLDING PATTERN AFTER MAKING SOME MOVES LAST QUARTER How Would You Describe Your Recent Activity In Industrials? 54%

Dec '15

34%

Inside The Buy-side®

Mar '16

24%

Jun '16* Sep '16

15%

19%

Net Buyer

24%

54%

29%

34% 25%26% 19%

18% 6%

Net Seller

Holding

Rotating

Holding “Already bearishly positioned.” Buy Side | N.A. “We have a service-related bias in Industrials. Will look selectively to take more cyclical risk if valuation multiples compress sufficiently.” Buy Side | N.A. “Asset mix decisions.” Buy Side | N.A.

*June 2016 values do not equal 100% due to 3% “Liquidating” not displayed on chart www.corbinperception.com

TREND: PRODUCT AND SERVICE ORDER RATES SHOULD “REMAIN THE SAME” QOQ; ANOTHER “STABILIZATION” DATA POINT

ShortShort-cycle Products

LongLong-cycle Products

3% 8%

14%

10%

Inside The Buy-side®

30%

19%

37%

Services 15%

30% 34%

45% 55%

39%

35% 31%

29%

Mar '16

Jun '16

Mar '16

35%

26%

18% Sep '16

57%

26%

35%

Accelerate Somewhat

www.corbinperception.com

72% 40%

67%

14%

46% 14%

13% Jun '16

Remain the Same

Sep '16

Mar '16

Decelerate Somewhat

Jun '16

Sep '16

Strongly Decelerate

92% CLASSIFY INDUSTRIALS AS FAIRLY TO OVERVALUED; A STOCK PICKER’S MARKET IS UPON US

Inside The Buy-side®

How Would You Classify Industrial Valuations In General? 44%

48%

Fairly

Over

8% Under

Which MarketMarket-cap Theme Is Currently Most Appealing? 50%

Believe Share Buybacks Are Not A Good Use Of Excess Free Cash Given Current Valuations

48% Assert the Industrial Sector Is In A Recession (up from 46% QoQ But Down From 69% In Dec ‘15)

14%

84%

Small

Are Placing More Emphasis On Balance Sheet Strength When Making An Investment Decision (up from 74% QoQ) QoQ)

36%

0% Micro

67%

www.corbinperception.com

Mid

Large

STRAIGHT FROM THE BUY / SELL SIDE: ON MARKET-CAP THEMES LargeLarge-cap “Are generally more stable, diverse earnings streams.” Buy Side | N.A

Inside The Buy-side®

“Most appealing because mid-cap valuations are most extended and I expect increasing volatility for small-caps. For large-caps, valuations are pretty comparable to history, so I’d give the nod to large caps at the moment.” Buy Side | N.A. “Have access to the most financing options.” Sell Side | N.A

MidMid-Cap “There is more growth coming from mid-cap names.” Buy Side | N.A “More self-help opportunities in slow-growing environment.” Sell Side | N.A. “Forex benefit.” Sell Side | Europe

SmallSmall-cap “Management decisions come through to the bottom line more effectively and quickly.” Sell Side | Europe

www.corbinperception.com

SENTIMENT ON INDIA REMAINS STRONG WHILE CHINA SEEN AS IMPROVING (OUR CHANNEL CHECKS WOULD SUGGEST OTHERWISE) Over The Next 6 Months, What Are Your Expectations For The Following Economies? India

54%

38%

8% +2 pts

-2 pts U.S.

42%

39%

19% NC

Inside The Buy-side®

-11 pts China

38%

27%

35% +3 pts

+21 pts Southeast Asia

33%

63%

4% -14 pts

+1 pt LatAm (ex-Brazil)

29%

46%

25% -9 pts

+3 pts 63% report Eurozone 27% being -1 pts “somewhat Mexico 26% concerned” -17 pts or “not concerned” Brazil 25% about Brexit +5 pts fallout Japan 4% +4 pts www.corbinperception.com

50%

23% -30 pts

61%

13% -1 pts

54% 63% Improving

21% -22 pts 33%

Staying the Same

Worsening

-5 pts

AROUND THE WORLD: CONCERN ON NON-RESI CONSTRUCTION SPIKES Over The Next 6 Months, What Are Your Expectations For The Following Economies?

Housing/Resi Const.

39%

22%

Inside The Buy-sideÂ®

+6 pts FX Headwinds

+7 pts 32%

41%

27%

-3 pts Oil & Gas Markets

+1 pts 30%

44%

26%

-19 pts Non-resi Const.

17%

+15 pts 44%

39%

-16 pts Global Capex Spending

+30 pts 57%

35%

+5 pts Improving

www.corbinperception.com

-9 pts Staying the Same

Worsening

SOME SIGNIFICANT SHIFTS IN SUBSECTOR SENTIMENT TAKING PLACE

Predicted To Grow Slower Than GDP

Predicted To Grow Faster Than GDP 65% 63%

Inside The Buy-sideÂ®

Building Products

60% 55%

Resi Construction

50% 45%

Water

Defense

Commercial Aero

50% 66%

Distribution

46% 45%

Industrial Equipment

46% 38%

Sentiment On Building Products And Resi Construction Remain Strong While Bulls Retreat On NonNon-resi Construction www.corbinperception.com

73%

Metals & Mining

50% 40%

Sep '16

68%

50% 55%

Machinery

37% Jun '16

Transportation (Trucking)

39% 42%

52%

Non-resi Construction

43%

Agriculture

50%

Jun '16

Sep '16

Ag Moving Back Into The Top 6 (With The Biggest Spike In Bearishness) And Metals & Mining Seeing Some Love Follow us @CorbinResearch

MARKET TO TRUMP: GET OFF YOUR STUMP

Inside The Buy-side®

Who Will Have The Most Positive Least Negative Impact On Markets?

Jun ‘16 '16

26%

Sep Sep '16 ‘16

27%

43%

23%

58%

11%

85% Survey Says: The Hillster (2 for 2) Jun Jun '16 ‘16

11%

Sep ‘16 '16

4% 19%

23%

40%

62%

26%

15%

23% Very Negative www.corbinperception.com

Negative

Neutral

Positive

Very Positive

Inside The Buy-sideÂŽ

ABOUT US

We are Corbin, a leading investor research and investor relations advisory firm that specializes in shareholder value creation. We leverage our broad company and industry experience, knowledge of best practices and benchmarking capabilities to provide research-driven counsel that enables our clients, publicly-traded companies across diverse industries, to positively differentiate their company in the market. We bring a unique perspective to our engagements, one that is based on deep investor expertise, a proven methodology and customized approach. Our industry-leading research, Inside The Buy-sideÂŽ, is covered by news affiliates globally and regularly featured on CNBC. To learn more about us and our impact, visit CorbinPerception.com