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IF IT’S CORBIN, IT’S ACTIONABLE
2Q17 Earnings Primer Industrial Sentiment Survey July 20, 2017 CORBINADVISORS.COM
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Inside The Buy-side® Industrial Sentiment Survey
Issue Date: July 20, 2017
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. Survey scope: 28 investors and analysts globally; buyside firms manage $914B in assets and have $133B invested in Industrials
Market Performance 1
2Q17
YTD
S&P 500
2.6%
8.3%
S&P Industrial
2.3%
9.8%
1
As of 7’12’17
Survey timeframe: Jun. 19 – Jul. 12, 2017
Role
Sector Focus
Region 14%
18% 39% 61% 82%
Buy Side
Sell Side
Industrials
Generalist
CORBIN ADVISORS
86%
N.A.
Europe
2
Word Cloud: Frequency Of Occurrence
CORBIN ADVISORS
3
Investors Expect Strong 2Q17 Earnings Performance; Major Shifts In Sub-sector Views Identified #1
From Spring To Summer: Economic Trends, Elevated Management Tone Drive Expectations For Strong Industrial KPIs
Following the most upbeat sentiment last quarter since survey inception,1 95% expect 2Q17 industrial earnings to meet or
beat consensus, with 75% expecting sequential improvement Approximately 80% anticipate continued top- and bottom-line increases, consistent with last quarter’s findings; cash flow
and margins expectations spike to all-time high levels2 Management tone characterized as increasingly positive; those classifying executive messaging as neutral to bullish or
bullish increases to 88% from 84% last quarter Nearly 60% describe their sentiment toward industrials as neutral to bullish or bullish, a slight increase QoQ
#2
Is It Only Down From Here For Industrials? Most Investors Believe We Are Mid- or Mid-to-Late Cycle
54% believe we are Mid to Mid-to-Late in the Industrial cycle, with the same number classifying the sector as overvalued, an
increase from 40% last quarter Only 35% expect U.S. GDP to improve over the next six months, decreasing more than double from last quarter; 53%
expect modest industrial organic growth of 2.0% to 2.5% in 2017 Those expecting the U.S. economy to worsen over the next six months increases to 17% from 13% last quarter with
outsized pessimism expressed toward Oil & Gas; any positive views out of earnings could be an accelerator Long-cycle products expected to accelerate, while short-cycle products and services increasingly projected to stay the same
#3
D.C. Gridlock Weighs On Sentiment; Deterioration In Hopes For Legislation Success Start To Weigh On Investor Views
Despite the majority of Trump’s policy proposals perceived to be positive for the U.S. economy, all reforms see significantly
less likelihood of passing in 2017 46% confirm D.C. gridlock is impacting their investment decisions, with 45% noting anticipated tax reform is not currently
priced into valuations Primary concerns include: 1) D.C. dysfunction; 2) valuations; 3) geopolitical volatility; and 4) oil prices 1 2
Jun. 2015 Since Dec. 2015
CORBIN ADVISORS
4
Coming Off The Most Bullish Earnings Sentiment Since Survey Inception, Near-term Expectations Remain Near Peak Levels
Expectations Regarding 2Q Earnings Performance Relative To Consensus
Jun '16 Sep '16 Dec '16 Mar '17 Jun '17
48% 43%
63% 58% 52% 50% 48% 34%
29% 21% 16%
21% 8%
Better Than
In Line
4% 5%
Worse Than
95% Expect In Line to Better
75% Expect sequential
Than consensus results
improvement
CORBIN ADVISORS
5
Expectations For KPIs At Or Near All-time Highs As Operating Margins and Cash Flow See Significant Improvement Revenue
84%
80% 80%
30%
45%
37%
41% 15%
Improving
35%
25% 22% 10%
5%
Staying the Same
EPS Growth 79%
46%
39%
36% 17%
10%
19%
25%
8%
Worsening
Improving
Cash Flow
8%
Staying the Same
4%
Worsening
Operating Margins 71%
71% 58% 38%
48% 45%
44% 36% 36% 25% 4%
Improving
Staying the Same
23%25%
19% 16%
36% 25%
Improving
Dec '16
31%
39%
8%
4%
Worsening
Sep '16
48%
46%
Mar '17
CORBIN ADVISORS
Staying the Same
4%
Worsening
Jun '17
6
Commentary On Earnings Expectations Vs. Consensus Better Than
In Line
“Short cycle trends continue to improve.” Buy Side,
“Higher industrial activity but expectations are higher.” Buy
Industrials, N.A.
Side, Industrials, N.A.
“CRB commodity index/unemployed ratio means economy is on sure footing, ABI index up for 39 months in a row, Restaurant Productivity Index (RPI) up for 89 months in a row.” Buy Side, Industrials, N.A.
“Better demand across most industrial end markets.” Buy
“Home price appreciation, domestic steel activity improving (due to tariffs), restructuring largely completed by many companies undertaking such, A&D activity ramping, strengthening sentiment from equipment providers and energy didn’t weaken until quarter end.” Buy Side, Industrials, N.A.
Side, Industrials, N.A.
“Expect better top-line but some cautiousness on margins.” Buy Side, Industrials, N.A.
“Top-line.” Buy Side, Industrials, N.A. “Discussions with end market customers.” Sell Side, Industrials, N.A.
“Lower jet fuel costs, strong demand and higher average ticket prices.” Sell Side, Industrials, N.A.
“Company commentary about improving momentum. Seems to be led by Europe with many groups saying U.S. currently flat.” Sell Side, Industrials, Europe
“Incremental margins.” Sell Side, Industrials, N.A.
Worse Than
“Resurgence in global capital spending, particularly in N.A.”
“Valuation, PMIs, commodity prices.” Sell Side, Generalist,
Sell Side, Industrials, N.A.
Europe
“There was a lot of uncertainty around what the new administration was going to do and that caused some freezing of plans that should be thawing now.” Sell Side, Industrials, N.A.
CORBIN ADVISORS
7
Perceived Executive Tone Registers Highest Positivity Level Since Survey Inception‌Investor Sentiment Closely Follows Suit
Investor Sentiment
24%
17%
Management Tone 59%
12%
19%
88%
Bullish
32%
42%
Neutral to Bullish Neutral
72%
Neutral to Bearish
69%
Bearish
24%
20% Mar '17
20%
17%
12%
4%
4%
8% 4%
Jun '17
Mar '17
Jun '17
CORBIN ADVISORS
8
Long-cycle Products Expected To Accelerate, While Short-cycle Products And Services Increasingly Are Projected To Stay The Same
Short-cycle Products
30%
4% 7% 7%
5%
Long-cycle Products
5% 29%
15%
10%
Services
5%
14%
30%
29%
33% 30%
4% 35% 55%
40%
75%
35%
72%
71% 52%
57% 52%
63%
62%
55%
50%
45%
35% 11%
20%
14%
Sep '16 Dec '16 Mar '17 Jun '17
Strongly Accelerate
13%
3% Sep '16 Dec '16 Mar '17 Jun '17
Accelerate Somewhat
Remain the Same
CORBIN ADVISORS
14%
4%
10%
Sep '16 Dec '16 Mar '17 Jun '17
Decelerate Somewhat
Strongly Decelerate
9
Industrials Generally Viewed As More Overvalued Than The Overall Market With Slight Uptick In Undervalued Views
Undervalued U.S. Industrials Equity Valuation Classification
“A long view.” Sell Side, Industrials, N.A.
Fairly Valued “Improved organic growth can really move expectations up.” Dec '16 12%
47%
Mar '17 12%
41%
48%
40%
Buy Side, Industrials, N.A.
“Original expectations for structural tax reform, U.S. infrastructure modernization and increased defense spending have been largely washed out of valuations and surprisingly replaced by private sector return to capital spending to drive organic growth.” Sell Side, Industrials, N.A.
Overvalued Jun '17
17%
29%
54%
“The market in general is fully valued and some of those spaces are the worst.” Buy Side, Generalist, N.A. Under
Fairly
Over
“They've come down recently but quality is still at a premium.” Buy Side, Industrials, N.A.
CORBIN ADVISORS
10
Most Investors Believe We Are Mid- to Mid-to-Late In The Industrial Cycle Early-to-Mid “After two-plus years of negative organic growth, most industrial economies are still running below mid-cycle.” Buy Side, Industrials, N.A.
Industrial Cycle Views
“Investment cycle for automation is just beginning and driving capex demand.” Sell Side, Industrials, N.A.
Mid
29% 25%
“It’s been a shallow industrial recession, though two years ago, we were probably mid- to late, then we pulled back. For a lot of companies, they were down 5%-10% and now they’re up.” Buy Side,
25%
Industrials, N.A.
17%
Mid-to-Late “When commercial construction is strong and states and municipalities are bullish, you are getting closer to the end.” Buy Side, Industrials, N.A. “Tight capacity utilization rates when you consider the operating of chemical facilities.” Buy Side, Industrials, N.A.
4%
“Although short-cycle trends have improved, I believe that fixed capital investment is later in the cycle.” Buy Side, Industrials, N.A.
Early
Early-toMid
Mid
Mid-toLate
Late
Late “Long bull market; consumer running out of steam.” Sell Side, Industrials, N.A.
“10 years since the start of the last recession and tighter monetary policy.” Sell Side, Industrials, N.A. CORBIN ADVISORS
11
Investing Trends Indicate Some Concern
How Would You Describe Your Recent Activity In Industrials? 54% Sep '16 Dec '16* Mar '17
41% 29% 23% 19%
18% 8%
Jun '17 Net Buyer
38%36%
33%32%
0%
9%
Net Seller
18%
19%20%
Holding
Rotating
Net Buying
Holding
Rotating
“We believe the sector is undervalued relative to others, which is why we've seen plenty of M&A activity over the past year.” Buy Side, Generalist, N.A.
“The market is fairly valued.” Buy
“Rotating out of short-cycle, economically-sensitive names to more stable, self-help companies with better valuations.” Buy Side, Industrials, N.A.
“The best industrial companies are the best companies, period!” Sell Side,
Side, Industrials, N.A.
“The depositors make the asset mix allocation.” Buy Side, Industrials, N.A.
“We are looking for misunderstood world-class industrials that are trading below their all-time highs and at a discount to their historical relative valuation.” Sell Side, Industrials, N.A.
Industrials, N.A.
*Dec ‘16 total does not equal 100% due to 3% “Liquidating” not displayed on chart CORBIN ADVISORS
12
Despite Heightened Revenue Expectations This Quarter, Investors Anticipate Relatively Modest GDP Growth In 2017 For The Economy And Industrials
What Are Your Predictions For 2017 U.S. GDP Growth?
Top Concerns 37%
37%
47% Dysfunction in D.C. 29% Valuations 11%
11%
25% Geopolitical environment
4% 1.5%
2.0%
2.5%
3.0%
Do Not Focus On GDP
14% Oil prices
53% Expect Industrials to achieve between 2.0% and 3.0% organic growth in 2017
CORBIN ADVISORS
13
Commentary On Top Concerns
Buy Side
Sell Side
“1) Dysfunctional Congress & President; 2) Fed withdrawing support for the markets; 3) Low capacity utilization.”
“1) Political gridlock; 2) Oil & Gas retrenchment; 3) Valuations.”
“1) Global economy; 2) Oil prices; 3) North Korea.”
“1) Political ineptitude; 2) Geopolitical issues like terrorism; 3) The USD.”
“1) No activity from Congress.”
“1) Valuation; 2) M&A; 3) Slowing auto sector.”
“1) Valuation; 2) China; 3) Trump.” “1) Washington; 2) Valuation.”
“1) Black swans; 2) Plummeting hydrocarbon prices; 3) The absence of statesmanship in all branches of government.”
“1) Commodities and impact to capex; 2) U.S. policy inaction; 3) Global political environment.”
“1) U.S. administration; 2) Geopolitical tensions; 3) Peaking consumer confidence and PMIs.”*
“1) Panic from novice investors; 2) Stupid strategy based on academics who never made money; 3) North Korea madness.”
“1) Legislative gridlock; 2) Executive branch irrationality; 3) Global political instability.”
“1) Interest rates; 2) PMIs; 3) Valuations.”
“1) Imported deflation; 2) Yield curve inversion; 3) Geopolitical.”
“1) Oil; 2) Valuations; 3) Inventories.”
“1) Industrial confidence; 2) Valuations.”* “1) Assets in ETFs now exceeds assets in hedge funds; 2) Over-mature equity rally; 3) War in the Middle East.”
* Europe-based CORBIN ADVISORS
14
While Europe Sees Continued Optimism, U.S. And India See Sharp Pullbacks In Bullish Sentiment Expectations For The Following Economies Over The Next Six Months
Eurozone
68%
27%
5%
+12 pts
+1 pt
U.S.
48%
35%
17%
-32 pts
+13 pts
Southeast Asia
45%
55% -8 pts
+3 pts
Brazil
35%
48%
17%
-17pts
China
-3 pts 30%
57%
13%
+14pts
India
-11 pts 32%
63%
5%
-35 pts
Japan
+5 pts 32%
50%
18%
+11pts
LatAm (Ex Brazil)
+14 pts 27%
55%
18%
+2 pts
Mexico
+10 pts
9%
68%
23%
-11 pts
-29 pts
Improving
Staying The Same CORBIN ADVISORS
Worsening 15
Some Outlooks For Macro Drivers See Significant Cracks; Pressure Mounts Against Oil & Gas And Non-Resi Constr. Expectations Over the Next Six Months
Global Capex
54%
33%
13% +3 pts
-11 pts
Housing/Resi. Const.
43%
43%
14% +9 pts
-2 pts
U.S. GDP
35%
61%
4% 0 pts
-37 pts
Oil & Gas Markets
29%
38%
33% +33 pts
-41 pts
Global
Trade*
29%
54%
17% NA
NA
Non-Resi Const.
26%
65%
9% +9 pts
-29 pts
Global PMI
26%
48%
26% -9 pts
-4 pts
FX Headwinds Company Input Costs Geopolitical
Volatility*
21% +21 pts 12% +2 pts 4%
67%
-4 pts 50%
38% -27 pts
63%
33% NA
NA *New measure
12%
Improving
Staying The Same CORBIN ADVISORS
Worsening 16
Auto Continues To Stall, While Agriculture Sees Least Negative Sentiment In Two Years
Predicted To Grow Faster Than GDP 47%
Machinery
Predicted To Grow Slower Than GDP
65% 74% 65%
Defense
Materials
Resi. Constr.
44% 53%
Non-resi Constr.
Comm. Aero.
53% 53%
Transportation
Ind. Equip. & Comp. Agriculture
50% 17%
Non-Resi Const.
Resi. Const. Water
41% 37%
Mar '17
Agriculture
47%
24%
Water
61%
58%
21%
Metals & Mining
58% 56%
Building Products
68% 76%
Automotive
Chemicals
Jun '17
5%
24% 16% 21%
11% 18% 56%
18% 23% 16% 12%
38% 68%
12% Mar '17
Agriculture, Water And Machinery See Biggest Jump In Bullish Sentiment
35%
Jun '17
Auto Sees Most Bearish Sentiment While Agriculture Finally Starts To Germinate
CORBIN ADVISORS
17
Stumped Trump: All Policies See Harsh Expectations From Investors Impactful of the Following on the U.S. Economy Likelihood Of Passage In 2017 U.S. Corporate Tax Cut
90%
5% 5% 32%
58 pts
45%
41 pts
5% 55%
19 pts
4% 41%
35 pts
23%
57 pts
52%
18 pts
10%
28 pts
5%
24 pts
-10 pts Repatriation
77%
23%
-4 pts Infrastructure Expansion Program
76%
19%
-3 pts U.S. Personal Tax Cut
73%
23%
-9 pts Immediate Depreciation Of Capex
56%
36%
8%
-23 pts Large Defense Spend Increase
52%
48%
+4 pts Border Adjustment Tax
48%
23%
29%
-21 pts Interest Non-deductibility
42%
37%
21%
-24 pts Healthcare Bill *
41%
50%
9%
33%
NA Positive
Neutral
Negative
*New measure CORBIN ADVISORS
18
Concerns With Washington Loom Large
Level of Concern Regarding D.C. Dysfunction
46%
Confirm D.C. dysfunction is impacting investment decisions
“Makes longer-term views even more difficult.” Buy Side, Industrials, N.A.
“It is, on the margin, influencing how we position within more economically- and policy-sensitive sectors.” Buy Side, Industrials, N.A.
50%
55%
“Creates uncertainty; every investor's biggest fear.”
Concerned
Sell Side, Industrials, N.A.
Somewhat
“Moderating U.S. bullishness.” Buy Side, Industrials,
Not At All
N.A.
29% 26% 21%
15% General Market
1
Industrials
“Structural tax reform, material increased defense spending, U.S. infrastructure modernization all make sense but must be largely deficit-neutral; because healthcare reform was never fixed but rather the focus was repeal and cut, this is further diminishing real progress on critical legislative reforms; deregulation is gradually occurring through executive orders and is a modest positive.” Sell Side, Industrials, N.A. “Looking for the status quo to stay intact.” Sell Side, Industrials, N.A.
1
Source: Corbin Earnings Primer, published July 13, 2017
CORBIN ADVISORS
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Most Of Anticipated Infrastructure Investment Priced In; Tax Reform Still A Tailwind
Anticipated Infrastructure Investment Currently Priced Into Valuations
Anticipated Tax Reform Currently Priced Into Valuations
73% 45%
25%
27%
20% 10%
0% 0%
Up to 25%
Up to 50%
0%
0%
Up to 75%
100%
CORBIN ADVISORS
0% 0%
Up to 25%
Up to 50%
Up to 75%
100%
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