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INSIDE THE BUY-SIDE® INDUSTRIALS NDUSTRIALS SENTIMENT SURVEY | ISSUE DATE: JANUARY 22, 22, 2016 2016
In the quarterly installment of our Industrials Sentiment
Price Performance1 S&P Industrials
S&P 500
Month to Date
(9.3%)
(9.0%)
4Q15
7.4%
6.5%
2015
(4.7%)
(0.7%)
Survey, we pulsed investors and analysts on their views heading into the fourth quarter earnings season. Our survey , comprising 39 investors and analysts globally who follow the industrial sector, reveals a growing belief that the sector is in recession. The fact that many of the opinions expressed came to fruition in the first weeks of 2016, makes predictions of continued pressure on commodities, stunted China growth and late cycle worries even more pressing. The challenging external backdrop and intensifying bearishness are likely to portend pessimistic outlooks this earnings season. The key question for investors is how pessimistic, as some deceleration of growth is already priced into valuations. 2
Inside The Buy-Side ®
Participant Stats Contributing buy side firms manage $2.3 trillion in total assets and have $77 billion invested in industrials as of the most recent filing period.3 Role Buy Side | 62% Sell Side | 38%
Sector Focus Industrials | 87% Generalist | 13%
Region N. America | 87% Europe | 8%
About Corbin Perception Corbin Perception is a leading investor research and integrated IR advisory firm assisting public companies with creating long-term shareholder value. 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 sectors and all market-caps, to differentiate their company as an investment. Our industry-leading research, Inside The Buy-side®, which tracks changes in investor sentiment, is covered by news affiliates worldwide and featured regularly on CNBC’s Squawk on the Street.
CorbinPerception.com info@corbinperception.com (860) 321-7309 Follow us @CorbinResearch
Other | 5%
1 2 3
As of Jan. 20, 2016 Timeframe: Dec. 21, 2015 to Jan. 5, 2016 Sep. 30, 2015 | Source: Thomson Reuters
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Our Industrials Industrials Sentiment Survey Yields Four Key Findings: Findings: #1: Sector Sentiment Is Bearish On Tepid Growth Projections And May Have Yet To Bottom; Bottom; Near Nearly 70% Of Of Respondents Believe We Are In An An Industrial Recession How Would You Characterize Your General Sentiment Toward Industrials? 61% 51% 33%
28% 16%
21%
18%
Bullish
Inside The Buy-Side ®
21%
Neutral 2Q15
•
51%
3Q15
Bearish 4Q15
Those expressing bearish sentiment are very concerned about the following:
–
63% 63% | Oil & Gas headwinds
–
55% 55% | China
–
50% 50% | Emerging markets (Ex. China)
•
To a lesser extent, FX headwinds continue to generate angst with 80% of bears expressing moderate concern, including 13% whom are very concerned
•
Nearly 70% of respondents believe the sector is in a recession
Looking Out Over The Next Six Months, How Do You See These Issues Progressing? Western Europe economy
45%
India economy
34%
U.S. economy China economy
Other emerging economies
11%
18%
36%
53%
Staying the Same
Worsening
42%
50%
37%
Non-resi construction
Global capex
53% 71%
Housing/resi const. spend
Oil & Gas markets
18%
34%
Improving
U.S. consumer spend
19%
58%
13% 11%
10%
47%
24%
Other developed economies
Impact of strong dollar
45%
50%
29%
10% Improving
13%
63%
18% 13%
8%
8%
45%
37%
26%
61%
37% Staying the Same
53% Worsening 2
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There continues to be a notable shift in bearish sentiment; while investors anticipate improvement in certain regions, levels are down across the board Seen as Improving Western Europe India U.S. China Other Developed Other Emerging
3Q15 63% (#1) 35% (#3) 41% (#2) 5% (#6) 25% (#4) 9% (#5)
4Q15 45% (#1) 34% (#2) 24% (#3) 13% (#4) 11% (#5) 11% (#6)
∆ -18 pts -1 pts -17 pts 8 pts -14 pts 2 pts
•
Sentiment on global capex spending has become more downbeat, in line with our broader research; 53% now expect spending to decline compared to 42% last quarter
•
While remaining dour, China has leveled off with 53% expecting the country’s economic climate to worsen, an improvement from last quarter’s 80%
•
Oil’s deterioration in early 2016 was no surprise as 61%, most polled before the New Year, anticipate Oil & Gas markets to worsen, up from 36% last quarter
Representative Quotes
Inside The Buy-Side ®
Cautiously Optimistic “Given how bad it's been, I'm hoping for a shift in sentiment as FX and oil lapses.” Buy Side | North America Neutral “Current fundamentals are strong but there is the potential for demand to slow during the year and the valuation isn't discounted relative to other sectors.“ Sell Side | North America Neutral to Bearish “The current lack of catalysts to create growth versus many unstable/opaque/softening geographies and end markets.” Buy Side | North America “Slowing organic growth, nearing peak margins, low energy, continued FX headwinds and volatility in emerging markets.” Sell Side | North America Bearish “Valuations are high and negative growth surprises are in the pipeline.” Buy Side | Asia “Industrials are overvalued, fundamentals turning down. Late in a recovery and late cycle nearing a peak.” Buy Side | North America
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Do You Think The Industrial Sector Is In A Recession?
Buy Side
71%
Sell Side
29%
67%
33%
Yes
No
When Will The U.S. Have Its Next Recession? Recession? 47%
21%
19%
Inside The Buy-Side ®
8%
2016
2017
2018
3+ Years
5% Not In Next Three Years
Representative Quotes Yes, In a Recession “I believe some sub-sectors are in a recession.” Sell Side | North America “Everyone denies it but when you speak with CEOs at length, it sure sounds like a recession.” Buy Side | North America
No “A few small parts within Machinery could be considered to be in a recession but that is not the case broadly.” Buy Side | North America “Would need to see negative organic growth rates consistently from a majority or large minority of diversified Industrial companies, not just capital goods providers.” Sell Side | North America
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…So How Does This Influence Views Heading Into 4Q15 Earnings Season? Season? For 4Q15, Do You See The Following Improving, Staying The Same Or Worsening? Cash Flow Growth
20%
EPS Growth
16%
Margin Rate
15%
Revenue Growth
10%
44% 31%
53%
36%
49%
18% Improving
•
36%
72% Staying the Same
Worsening
Cost-cutting initiatives should somewhat offset decelerating top-line growth to provide some support for EPS but a majority are anticipating earnings misses
Inside The Buy-Side ®
What Do You Expect For 4Q15 Earnings Versus Consensus? Consensus?
Buy Side
13%
Sell Side
13%
29%
58%
33%
Better Than
54%
In Line
Worse Than
Representative Quotes In line “There is a steady economic outlook and good supply/demand trends.” Sell Side | North America “It will be worse organic but better non-operating.” Buy Side | North America Worse Than “Oil & Gas, Mining, Agriculture, Latin America, China…general Industrials are all continuing to run softer than expected. FX becoming a competitive disadvantage besides just translation issues.” Buy Side | North America
“There is a strong dollar and weak end market demand. Growth in new autos slows.” Sell Side | North America
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What Do You Anticipate The Direction Of 2016 Annual Guidance To Be Versus Consensus?
Buy Side
8% 12%
Sell Side
27%
80%
6%
Higher
67%
About the Same
Lower
Representative Quotes “I do not expect too much EPS growth organically; looking at flattish to slightly growing organic sales and continuing FX headwinds.” Buy Side | North America “Thus far, we've seen a few outlook calls for 2016 and they were all below consensus. Consensus is too optimistic going into January and then expectations are right-sized during 4Q earnings season in January and February.” Sell Side | North America
Inside The Buy-Side ®
“Guidance doesn’t appear to properly capture weakening end market condition.” Buy Side | North America
How Would You Describe Management Tone?
4Q15
67%
3Q15
52%
Bearish
Bullish
3% 17%
6%
24%
Cautiously Optimistic
13%
18%
Neutral
What Do You Expect From 2016 U.S. Industrials’ Industrials’ Sales Growth Rates Versus 2015? 2015?
Buy Side
Sell Side
8%
29%
27%
Faster
63%
13%
About the Same
60%
Slower
•
Expectations for 2016 organic growth are tepid; 53% of respondents anticipate flattish growth while more than one-quarter believe negative growth is a possibility
•
Nearly 40% are a little more optimistic, pegging predicting 1% to 2% organic growth 6
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#2: Industrials May Have More Room To Fall As Sellers Outpace Buyers 3:1 3:1 How Would You Describe Your Recent Investment Activity? 34%
34% 28%
32% 34%
31% 23%
24%
21% 14%
17%
8%
Rotating Within Sector
Net Buyer Jun '15
Holding Sep '15
Net Seller
Dec '15
Holding “Already defensively positioned inside Industrials.” Buy Side | North America Rotating (within Industrials) “Rotating to relative values.” Buy Side | North America
Inside The Buy-Side ®
“Clients looking for pockets of growth.” Sell Side | North America Net Sellers “Weaker expectations will be met with lower stock prices. Multiples should not expand at this point in the macro cycle.” Sell Side | North America “Commodity prices, rising rates, Trucking and Rail pricing.” Sell Side | North America Other “We do not own many Industrials now but are constantly looking at them to determine when to get into them. So far, we have not found a compelling situation/valuation.” Buy Side | North America
For 2016, What Do You Expect Industrial Valuations To Do?
Buy Side
29%
Sell Side
27%
Expand
42%
29%
33%
Remain Flat
40%
Contract
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Representative Quotes Expand “Some verticals will be challenged but generally speaking, Oil & Gas has gotten to be a much smaller piece of the pie, so a further step down has less bite. I expect better FX picture with U.S. dollar perhaps weakening, continued strength in consumer-oriented industries and pick-up in macro.” Buy Side | North America
“I anticipate a rebound.” Sell Side | North America Remain Flat “Buy side is already there on lower growth. Industrials are already trading at a discount to the market.“ Buy Side | North America
“First half of the year is likely to be difficult and multiples could compress further toward lower end of historical valuation range. Second half of 2016 could show improved results and if evidence starts to support this, multiples could expand ahead of this.” Buy Side | North America “If there are signs of improvement as the year progresses and the Fed stays dovish and the dollar doesn't strengthen, the multiple will definitively move up. The reverse is also true on the downside. EBITDA multiples, while down from peak levels, are not super cheap now compared to their 7-year history.” Buy
Inside The Buy-Side ®
Side | North America
“With soft but no materially changing environment, no reason to believe multiples expand/contract meaningfully.” Buy Side | North America Contract “A slowdown in the economic outlook could cause investors to reset forward rent growth expectations, which is likely to impact the multiples investors are willing to pay for industrial real estate properties.” Sell Side | North America
“Consensus view is too high resulting in miss to earnings potentially all year.” Sell Side | North America “Growth and profitability fears will not support current multiples.” Buy Side | North America
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#3: Pockets Of Optimism Exist In Construction & Building Products; Products; Another Tough Year Ahead For Mining, Machinery And Materials How Do You See End Markets Performing Relative To Global GDP Over 12 Months? Resi Construction
84% 76%
19%
5%
Building Products
76%
19%
5%
71%
Defense Water
50%
Automotive
49%
Agriculture
15% 8%
Transportation (Trucks)
5%
Ind. Equip. & Comp.
5%
Materials
5%
Machinery Metals & Mining
29%
66%
Distribution
Inside The Buy-Side ®
3%
Non-resi Construction
Commerical Aerospace
23%
11%
43% 27% 37%
7% 24%
48%
14%
78%
27%
68%
21%
74%
19%
76%
3% 10%
87%
3% 3%
94% Grow Faster
•
13%
Grow In Line
Grow Slower
Views on sectors continue to tighten with significant shifts occurring in both bullish and bearish sentiment; a barbell scenario has emerged and top movers +/- include: Grow Faster Resi Construction Defense Non-resi Commercial Aerospace Building Products
3Q15 56% 38% 50% 50% 61%
4Q15 84% 66% 76% 71% 76%
Grow Slower Transportation (Trucks) Ind. Equip. & Comp Machinery Agriculture Metals & Mining
3Q15 17% 44% 58% 53% 70%
4Q15 68% 74% 87% 78% 94%
∆ 28 28 26 21 15
pts pts pts pts pts
∆ 51 30 29 25 24
pts pts pts pts pts
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#4: In A Slowing Market, Protect The Balance Sheet And Invest For Growth For Industrials Generally, What Is Your Preferred Use Of Excess Cash? 61%
57% 43% 15%
Organic Investment
21%20%
M&A
14% 9% 13%
4% 5% 3%
Debt Paydown 2Q15
Dividends 3Q15
11%
18% 3%
Buybacks
0% 0% 3% Hold Cash
4Q15
Are You Placing More Weight On Balance Sheet Strength?
Inside The Buy-Side ®
No, 15%
Yes, 85%
Closing Thought Given mounting concerns about a global growth slowdown and possible U.S. recession, ongoing Corbin Perception research reveals that 84% of buy side contributors are keen on hearing management address scenario planning for an economic recession, describing it as Important to Critical. As such, we recommend the following: •
Analyze your historical revenue sensitivity to Global/U.S. GDP
•
Understand your cyclicality
•
Construct scenario analyses for use if conditions weaken dramatically
–
Plan for three different organic growth scenarios identifying impact on cash flow, income statement and leverage
–
Establish triggers and develop actions you would take
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