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3Q17 Earnings Primer Industrial Sentiment Survey October 19, 2017 CORBINADVISORS.COM
Inside The Buy-side® Industrial Sentiment Survey
Issue Date: October 19, 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.
Market Performance
Survey scope: 30 investors and analysts globally; buyside firms manage $287B in assets and have $35B invested in Industrials
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3Q17
YTD
S&P 500
3.9%
13.9%
S&P Industrial
3.7%
14.0%
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As of 10’11’17
We can change to as of 10’13’17 once data is in
Survey timeframe: Sep. 14 – Oct. 11, 2017
Role
Sector Focus
Region 77%
N.A. 33%
43% 57%
Europe 67%
Asia Latin America
Buy Side
Sell Side
Industrials
13% 7% 3%
Generalist
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Word Cloud: Frequency of Occurrence
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Key Findings: Industrial Sentiment Remains Elevated; Sector Expected to Overcome Rising Costs and Geopolitical Uncertainty #1
Investors Expect Strong 3Q17 Industrial Results, Marking the Fourth Consecutive Quarter of Upbeat Sector Sentiment; Hurricane Impact/Recovery Seen as Wildcard Heading into Year-end
§ Nearly 90% expect Industrial earnings to meet or exceed consensus, with over half expecting beats; 66% predict
sequential improvement § Management tone remains positive; outright bulls see an uptick while those classifying executive messaging as Neutral to
Bullish or Bullish decrease to 84% from 88% last quarter § Over 60% remain Neutral to Bullish or Bullish toward Industrials, a slight sequential increase and the most upbeat tone
recorded since survey inception1 § Mother Nature’s influence…most expect Harvey & Irma recovery efforts will be a boon to 2018 U.S. GDP though nearly
60% expect hurricane impact to have negative implications on 4Q17 results
#2
Growth Expected to Continue into 2018 Though Investors Believe We Are Approaching Mid-to-Late Cycle; Majority Now Consider Industrial Stocks Fairly Valued
§ 41% believe we are Mid-to-Late in the Industrial cycle, an increase from 29% last quarter § More than half classify Industrial equities as Fairly Valued; the Overvalued camp shrinks to 35% from 54% § No signs of deceleration; 71% expect U.S. GDP to improve over the next six months, nearly doubling from last quarter; 69%
anticipate 4.0% to 5.0% industrial organic growth in 2018, an improvement from expectations of 3.0% to 4.0% for 2017 § Nearly 75% anticipate revenue growth to improve in 2018 versus 2017 with global capex expected to increase over the next
six months; Brazil sees massive spike in sentiment after posting second consecutive quarter of GDP growth
#3
It’s a Zoo Out There! D.C. Tug-o-War, Geopolitics Remain Top of Mind; Defense Sector the Largest Potential Beneficiary
§ Primary concerns include: 1) government ineptitude; 2) geopolitical concerns, with emphasis on escalating N. Korea
tensions; 3) interest rate hikes § 95% expect geopolitical volatility to Stay the Same or Worsen, while only 22% expect the Washington D.C. political scene
to Improve § Over 80% expect Defense to Grow Faster than GDP, the second highest sentiment ever recorded for any sub-sector,
trailing only Resi. Construction in Dec. 2015 1
Jun. 2015
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Most Bullish Earnings Sentiment since Survey Inception Expectations Regarding 3Q17 Earnings Performance Relative to Consensus
Tough Comps
Services Management Tone Sep '16 48%
Dec '16 Mar '17 Jun '17
52%
58%
63% 48%
43%
52% Hurricanes Price/cost
35%
29% 21%
21%
Sep '17
8% Better Than
87%
In Line
Expect In Line to Better Than Consensus Results
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13% 4% 5%
Worse Than
66%
Expect Sequential Improvement
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Fewer Expect KPIs to Improve than Prior Quarter Following All-time Highs; Revenue and EPS Still Expected to Be Strong, While Cash Flow and Margins More Muted Key Performance Indicators Revenue
80% 80%
84%
EPS Growth 79%
65%
66% 41%
37%
39% 15%
Improving
20% 10%
Staying the Same
22% 5%
10%
36%
15%
8%
Worsening
Improving
Cash Flow
25%
19% 8%
Staying the Same
4%
Worsening
Operating Margins 71%
71% 45% 48%
17%15%
46%
42%
36% 36% 25%
25%
19% 16%
50%
48%
44% 31%
39%
36% 25%
12%
8%
4% Improving
Staying the Same
Improving
Worsening
Dec '16
Mar '17
19%
Jun '17
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Staying the Same
4%
Worsening
Sep '17 6
Similar to Overall Market Sentiment, Expectations Are for Continued Industrial Strength in 2018, While Margin Expansion Outlooks More Tempered Expectations for 2018 Versus 2017
EPS Growth
76%
Revenue
74%
Cash Flow
Operating Margins
20%
16%
64%
10%
36%
48%
Improving
4%
40%
Staying The Same
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12%
Worsening
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Commentary on Earnings Expectations Vs. Consensus Better Than
In Line
“Jobs creation.” Buy Side, Industrials, N. America
“Seeing improvement but 3Q may lack the upside of previous quarters.” Buy Side, Industrials, N.
“Inflection in end markets (e.g., Fluids, Oil & Gas capex, Aerospace, Non-Resi Construction, Machinery).” Buy Side, Industrials, N. America “There is still strong industrial order momentum, currency swinging to a tailwind offset by some further raw materials cost increases (mostly taken care of due to price increases) and hurricane headwind.” Buy Side, Industrials, N. America “The wild card is the storm's impact. Outside of that, they will come in above but that is the wild card.” Buy Side, Generalist, N. America
America
“Expectations have been reduced to more realistic levels.” Buy Side, Generalist, N. America “Improving manufacturing PMI series.” Sell Side, Industrials, Europe
Worse Than “Cost inflation, weak pricing, hurricane impact.” Buy Side, Industrials, N. America
“Hurricane disruptions, price/cost headwinds.” Buy
“Industrial economy seems to be improving slightly.”
Side, Industrials, N. America
Sell Side, Industrials, N. America
“The impact from hurricanes.” Sell Side, Generalist,
“Calendar effect holding back growth in Q2 while this swings back in Q3 and underlying growth has accelerated.” Sell Side, Industrials, Europe
N. America
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Perceived Executive Tone and Investor Sentiment Remain Near All-Time High Levels
Investor Sentiment
17%
23%
Management Tone 61%
19%
24%
84%
Bullish
42%
Neutral to Bullish
38%
Neutral Neutral to Bearish
69%
60%
12% Sep '17
Bearish
20% 31% 17% 4%
8%
8% 4%
Jun '17
Sep '17
Jun '17
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4%
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Short- and Long-cycle Products See Slight Pullbacks, While Services Expected to Accelerate
Short-cycle Products 4% 7% 7%
5%
5% 29%
Long-cycle Products
15%
10%
5%
Services
9%
30%
29%
33% 30%
40%
4% 35%
43% 55%
46%
22%
75% 71% 52%
44%
11%
20%
14%
4%
Dec '16 Mar '17 Jun '17 Sep '17
Strongly Accelerate
52%
62% 50%
63%
Remain the Same
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57%
36%
9% 3% Dec '16 Mar '17 Jun '17 Sep '17
Accelerate Somewhat
55% 45%
4%
10%
Dec '16 Mar '17 Jun '17 Sep '17
Decelerate Somewhat
Strongly Decelerate
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Industrials Increasingly Viewed as Fairly Valued; Half Report Holding Stocks, While Net Buyers See a Slight Uptick
U.S. Industrials Equity Valuation Classification
QoQ Investment Trends
50%
Sep '16 8%
44%
48% 38%
Dec '16
12%
47%
41%
33% 32%
29%
Mar '17 12%
Jun '17
48%
17%
29%
40%
23%
36%
25% 21%
54%
9% 4%
Sep '17
13%
52%
Under
Fairly
0%
35%
Over
Net Buyer
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Net Seller
Holding
Rotating
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Anticipated Infrastructure and Tax Reform Still Tailwinds; Majority Suggest Some Infrastructure Upside Is Already Baked in
Anticipated Infrastructure Investment Currently Priced into Valuations
Anticipated Tax Reform Currently Priced into Valuations
42%
53% 26%
33%
16% 11% 7%
7%
5% 0%
0%
Up to 25%
Up to 50%
Up to 75%
100%
0%
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Up to 25%
Up to 50%
Up to 75%
100%
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Investors Believe We Are Increasingly Moving toward Mid-to-Late in the Industrial Cycle; Organic Growth Expected to Improve in 2018 but Few Still Expect 5.0%+ Industrial Cycle Views
Early-to-Mid “We had a long downcycle that is now starting to get positive momentum.” Buy Side, Industrials, N. America
41% 25% 26%
25%
29% 17% 18%
11% 4% 4%
Mid
Early
Early-toMid Jun '17
Mid
Mid-toLate
Late
Sep '17
Expectations for FY 2018 Organic Growth
19%
19% 12%
6%
“Growth of margins, level of M&A.” Buy Side, Industrials, N. America
“While the overall economy is later in the cycle, Industrials went through a recession, which only ended three quarters ago. Additionally, the dearth of capex projects hasn't made the recovery very robust, which could begin in the coming year.” Buy Side, Industrials, N. America
Mid-to-Late
38%
6%
“U.K. companies have been reporting dull demand for years, PMIs imply this should start to improve from here and Q2 suggested this was the case.” Sell Side, Industrials, Europe
“Duration of overall biz cycle, pickup in later cycle end markets like E&C and Aero production. I also think an infrastructure bill gets passed. Early cycle Autos/Airlines rolling over a bit.” Buy Side, Industrials, N. America
“Interest rate hikes, credit availability.” Buy Side, Industrials, N.
2.0%
2.5%
3.0%
4.0%
4.5%
5.0%
America
Late
100%
Believe the Fed Will Continue to Raise Interest Rates in 2018
“Shear duration of bull market.” Sell Side, Generalist, N. America
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Commentary on Top Concerns
1
U.S. government ineptitude
2
Geopolitical concerns, with emphasis on escalating N. Korea tensions
3
Interest rate hikes
Buy Side
Sell Side
“1) Yellen; 2) Kim Jong Un; 3) Any economics noble prize.”
“1) Fed rate hike/balance sheet missteps; 2) Disruptive legislation (primarily Healthcare).”
“1) Geopolitical; 2) U.S. legislative agenda; 3) Sustainable growth outside U.S.”
“1) Price/cost; 2) Effective capital deployment; 3) Valuations.”
“1) Price/cost; 2) Hurricane disruptions; 3) Inability of government to enact fiscal stimulus.”
“1) China financial stability; 2) North Korea political instability; 3) Trump unpredictability.”
“1) Earnings; 2) Pace of Fed hikes; 3) Geopolitical.”
“1) China slowing; 2) Valuations; 3) Consumer electronics slowing.”
“1) The Fed moving too fast; 2) No tax reform; 3) Broader conflict with North Korea.” “1) No tax bill; 2) No infrastructure bill; 3) Shortfall in NonResi Construction.”
“1) Duration of bull market; 2) Chinese economy; 3) Dysfunction in Washington.” “1) Geopolitical tensions; 2) Trade wars; 3) Policy missteps.” “1) Trump impact; 2) Brexit impact; 3) FX.” “1) Monetary policy normalization in U.S. and Eurozone; 2) Geopolitical risks in East Asia and Middle East; 3) Painful economic reform in China.”
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Though D.C. Dysfunction Remains a Concern, Infrastructure Bill More Likely to Pass Following Hurricanes, Which are Expected to Lift 2018 GDP by ~50 bps Washington D.C. Political Scene Trend Versus First Half of the Year
Impact of Hurricanes Harvey & Irma on U.S. GDP
22%
25% 17%
43%
63%
Positive No Impact
58%
35%
Negative
33% 4%
4Q17
Improving
Staying the Same
2018
Worsening
Probability of Passing due to Impact of Hurricanes Harvey & Irma 13%
4%
74%
78%
9%
13%
18%
Infrastructure Bill
Tax Reform
Healthcare Reform
56%
No Impact
35%
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Higher Lower
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Sentiment Largely Remains Strong; Brazil Finally Sees Light at the End of the Tunnel Though Views on China Increasingly Negative News on Brazil: Click Here Click Here
Global Economy Expectations Over the Next Six Months
Brazil
80%
10%
+45 pts
-7 pts
Eurozone
67%
28%
-1 pt 62%
33%
LatAm (Ex Brazil)
55%
40%
5%
+28 pts
-13 pts
Southeast Asia
45%
45%
10%
0 pts
+10 pts 40%
60%
+8 pts
-5 pts 35%
55%
10%
+3 pts
Mexico
-8 pts 35%
50%
15%
+26 pts
China
5% -12 pts
+14 pts
Japan
5% 0 pts
U.S.
India
10%
-8 pts
10%
55%
35%
-20 pts
+22 pts
Improving
Staying The Same CORBINADVISORS.COM
Worsening 16
Most Measures See Signs of Improvement, Though Company Input Costs and Geopolitical Volatility Expected to Worsen Expectations Over the Next Six Months
Oil & Gas Markets
71%
29% (Worsening, -33 pts)
+42 pts
U.S. GDP
71%
29% -4 pts
+36 pts
Non-Resi Const.
71%
19%
10% +1 pt
+45 pts
Global Capex
57%
43% -13 pts
+3 pts
Global Trade
43%
57%
+14 pts
Housing/Resi. Const.
-17 pts 43%
48%
9% -5 pts
0 pts
Global PMI
38%
43%
19% -7 pts
+12 pts
FX Headwinds
38%
33%
29%
+17 pts
Geopolitical Volatility Company Input Costs
+17 pts
5% +1 pt 5%
40%
55% +22 pts
24%
71%
-7 pts
Improving
+33 pts
Staying The Same CORBINADVISORS.COM
Worsening 17
Defense in the Spotlight amid North Korea Concerns; Auto Remains in Neutral
Predicted to Grow Faster than GDP
Predicted to Grow Slower than GDP
65%
Defense
56%
Building Products
81%
68%
53% 57%
Comm. Aero. 35%
Chemicals
37%
Non-Resi Const.
Automotive Metals & Mining
35%
Transportation Machinery
50%
Distribution
50%
Resi. Const. Water
48% 48%
65%
41% 47%
Water Jun '17
25%
6%
16% 18% 12% 16% 12% 14%
Machinery
12% 14% 21% 14% Jun '17
Sep '17
Defense Sees Spike in Bullish Sentiment, Reaches Highest Level since Survey Inception
35%
19%
Chemicals
Non-resi Const.
76%
18% 23%
Agriculture
53% 50%
Resi Const.
59%
Sep '17
Auto Sees Most Bearish Sentiment Again and Distribution Sees Largest Uptick
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Organic Growth, Organic Growth, Organic Growth Preferred Uses of Cash In Descending Order of Top Two Combined Preferences
Reinvestment
M&A
60%
15%
Debt Pay Down
15%
30%
29%
Dividend Growth 5%
24%
21%
Buybacks
10%
Dry Powder
10%
10% 5%
15%
32%
15%
10%
Primary Choice
Second
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Third 19
Other Topics of Interest Earnings Calls
1
Margins
2
Capex
3
End Market Demand
“Can they find enough deplorables (welders, assemblers, plumbers, carpenters, mechanics) to rebuild America?” Buy Side, Industrials, N. America
“Cost inflation, cost reductions, pricing actions.” Buy Side, Industrials, N. America “Ability to raise margins.” Buy Side, Industrials, N. America “Raw materials outlook, capex outlooks, transportation network capacity.” Buy Side, Industrials, N. America “Organic growth trends.” Buy Side, Industrials, N. America “Strength and sources of end market demand, competitive pressures, supply chain challenges and opportunities.” Buy Side, Generalist, N. America
“Changes in the ability to compete and/or operate globally given rise in nationalist rhetoric.” Sell Side, Industrials, N. America “Exposure to Chinese and Indian economies and risk management against same.” Sell Side, Generalist, N. America
Most Compelling Technology Themes within Industrial or Other Growth Sectors
1
Automation/robotics
2
IoT
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E-commerce
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