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IF IT’S CORBIN, IT’S ACTIONABLE
1Q18 Earnings Primer Industrial Sentiment Survey April 17, 2018 CORBINADVISORS.COM
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Inside The Buy-sideÂŽ Industrial Sentiment Survey
Issue Date: April 17, 2018
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.1
Market Performance
Survey Scope: 25 investors and analysts globally; buyside firms manage $1.9 trillion in assets and have $256 billion invested in industrials
YTD*
YoY
S&P 500
(2.0%)
11.8%
S&P Industrial
(1.0%)
12.0%
* As of Mar. 29, 2018
Survey Timeframe: Feb. 26 – Apr. 4, 2018
Role
Sector Focus
Region 4% 12%
35%
40% 60%
Buy Side
1
Sell Side
The Industrial Sentiment Survey was launched Jun 5, 2015
65%
Industrials
Generalist
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24%
N. America
60%
Europe
Asia
Other
2
Word Cloud: Frequency of Occurrence
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Key Findings: Global Growth and Tax Reform Drive Strong Expectations; Heightened Concerns Weigh on Sentiment Somewhat #1 Continued Growth Expected in 2018 but Not Without Margin Pressure Majority continue to describe sentiment as Neutral to Bullish or Bullish, management tone still described as upbeat Greater than 95% expect earnings to meet or beat consensus with nearly 70% expecting tax reform to contribute up to 50
bps to 2018 U.S. GDP Organic growth and EPS are expected to improve (albeit at muted levels sequentially), though margin outlooks temper
amid inflation pressure 2018 organic growth expectations shift to 5.0%+ from 4.0%-5.0% last quarter as global capex still expected to improve
over the next six months Net Buyers increase to 39% from 31% QoQ, a survey high
#2 Heightened Concerns Driven by the Fed, Trump and Inflation Eroding the Edges of Sentiment More than 60% note High concern levels about rising input costs (aided) and trade wars, while top three unaided worries
include interest rate hikes, trade wars and inflation, respectively All global economies except India and China see pullbacks in positive sentiment; Eurozone, Mexico and Japan see the
largest degradations More than 60% believe we are Mid-to-Late or Late innings in the cycle; 46% expect Industrials to peak in 2019
#3 Significant Shifts in Sub-sector Sentiment Identified 89% expect Defense to Grow Faster than GDP, the highest sentiment ever recorded for any sub-sector Non-Resi and Resi Construction see deteriorating sentiment following continued interest rates hikes; to that end, nearly
75% expect Fed Funds rate to climb to between 2.0% and 2.25% at YE 2018 Chemicals gets a double-whammy; bulls decrease to 44% from 67% while bears jump to 17% from 0% sequentially CORBINADVISORS.COM
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2018 Outlooks Come in Strong as Expected; 5.0%+ Organic Growth Anticipated In Line
2018 Guidance Outlooks Vs. Expectations
“China doing better.” Buy Side, Generalist, N. America “Seemingly conservative organic guidance given macro data points.” Sell Side, Industrials, N. America
65%
“The implication of tax cuts hasn’t fully sunk in.” Sell Side, Industrials, N. America
Worse Than
22% 13%
Better Than
In Line
“Cautious organic revenue growth but higher tax-driven earnings.” Buy Side, Generalist, Asia “I am a little more optimistic and most Industrial executives are a little bit guarded about growth because of White House uncertainties.” Sell Side, Industrials, N. America
Worse Than
Expectations for 2018 Organic Growth
31% 17% 6%
<3.0%
31%
25% 17%
13% 6%
0% 3.0%
62%
6%
0%
3.5%
4.0% Dec '17
31% 17%
0%
4.5%
5.0%
>5.0%
Mar '18
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Continued Strong Expectations Driven by Global Growth and U.S. Tax Reform; Sequential Improvement Expected but at a Slightly Muted Level Expectations Regarding 1Q18 Earnings Performance Relative to Consensus
Tax Reform Global Growth
Jun '17 Sep '17
52% 54% 50%
52% 46%
43% 35%
39%
Dec '17 Mar '18
13% 7%
5% Better Than
60%
Expect Sequential Earnings Growth
In Line
96%
vs. 75% Last Quarter
4%
Worse Than
Expect In Line to Better Than Consensus Results vs. 93% Last Quarter
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Commentary on Earnings Expectations Vs. Consensus Better Than – 50%
In Line – 46%
“Tax reform and organic growth.” Buy Side,
“General economic acceleration hampered somewhat by adverse weather.” Buy Side,
Industrials, N. America
Generalist, N. America
“Improving demand and better pricing.” Buy Side, Industrials, N. America
“Lower tax rate and pick-up in Europe and the U.S.”
“Uncertainty over further global economic expansion.” Buy Side, Generalist, Europe
Buy Side, Generalist, N. America
“Tough comps and FX.” Buy Side, Industrials, Europe
“Acceleration of macro data.” Sell Side, Industrials, N.
“Key leading indicators growing less than a year ago, which will cause revenue disappointments. EPS may beat as analysts still don’t know the full effects of U.S. tax reform.” Buy Side, Generalist, Asia
America
“Economic trends have been favorable and a trade war hasn’t started yet.” Sell Side, Industrials, N. America
“Tax reform and global growth.” Sell Side, Generalist, N. America
* Worse Than (4%)
“New tax cuts a big factor sequentially; guidance toward impacts has been pretty granular and likely baked into consensus.” Sell Side, Industrials, N. America
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Revenue and EPS Still Expected to Expand While Cash Flow Growth Cools Likely as Companies Invest in Organic Growth, Capacity Expansion and Technology Key Performance Indicators
83% 80% 75% 65%
Revenue
EPS Growth 79% 74% 67% 66%
20%17% 15% 10%
15% 10%
29% 19% 17% 15%
10%
4%
0% Improving
Staying the Same
Worsening
Improving
Cash Flow 71%
Worsening
71% 56%
54% 42% 25%
38%
31%
19% 4%
Improving
Staying the Same
7% 4%
Operating Margins
74%
46%
19%
Staying the Same
12%
25%
42% 33%
7% 8%
4% Improving
Worsening Jun '17
33%
50%
Sep '17
Dec '17
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Staying the Same
25% 19% 11%
Worsening
Mar '18 8
Topics of Interest for 1Q18 Earnings Calls
1
Price/Cost Dynamics, Impact on Margins
2
Organic Growth Trends
3
Demand Environment
Buy Side
Sell Side
“Pricing power.” Industrials, N. America
“Changes in organic activity or growth as a derivative of tax cuts.” Industrials, N. America
“U.S. macro demand.” Industrials, N. America “Implications of tariffs and a trade war, price/cost dynamics, M&A pipeline and use of tax reform benefits.” Industrials, N. America “Plans for organic growth and margin expansion.” Generalist, N. America
“Material input costs, material shortages, lead times for supplies.” Industrials, N. America “Pricing.” Industrials, N. America “Rates.” Industrials, N. America “New product development, R&D investment, capital investment.” Generalist, N. America
“Margin opportunities and risks as well as demand levels.” Generalist, N. America “Price versus cost trends.” Generalist, N. America “Organic growth trends and the elevated prices for M&A.” Generalist, Asia
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Investor Sentiment and Perception of Management Tone Remain at Elevated Levels; Despite Heightened Concerns, Bearish Views Trend to Zero
Investor Sentiment
73% 31%
22%
Management Tone
83%
96%
92% 40%
39%
52%
57%
4% 4%
4%
Dec '17
Mar '18
Bullish Neutral to Bullish Neutral
42%
61%
Neutral to Bearish Bearish
17% 10% Dec '17
17% Mar '18
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Tax Reform to Drive Near-term Results; Nearly 70% Expect Up to 50bps Impact on 2018 U.S. GDP Growth 0 – 0.25% Tax Reform Impact on 2018 U.S. GDP Growth
“Overall, it gives a modest boost to the economy, although companies are likely to reinvest more of the savings; the net benefit to S&P EPS is lower than originally perceived.” Buy Side, Generalist, N. America “It’s a bad policy, rushed and over the long term, bad for the U.S.; it adds to the deficit.” Buy Side, Generalist, N. America
37% 32%
0.25 – 0.50% 27%
“Positive.” Buy Side, Industrials, Europe “It’s stupid to give mega stimuli when unemployment is at a record low, interest rates are near zero and it’s not funded, so a huge deficit is looming.” Buy Side, Generalist, Asia
4%
“It’s sad; we should be able to have a national discussion on what we want to do with our taxes. Instead, we are only offered the choice of taxes up or down, without any regard for what we should be focused on.” Sell Side, Industrials, N. America “I hope it’s not temporary.” Sell Side, Industrials, N. America
0 - 0.25%
0.25 - 0.50% 0.50 - 0.75%
>0.75%
0.50 – 0.75% “It’s very positive for capex, corporate cash flows, reported earnings and consumer take-home pay.” Buy Side, Generalist, N. America >0.75% “On the corporate side, it’s very positive but on the consumer and individual side, a bit less so.” Sell Side, Generalist, N. America CORBINADVISORS.COM
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Investors Believe We Are Mid-to-Late in the Industrial Cycle with Peak Earnings Generally Not Expected until 2019/2020; Dark Clouds Loom Where Are We in the Industrial Cycle?
How Much Concern Do You Have on Following Factorsâ&#x20AC;&#x2122; Impact on the Generally Positive Growth Momentum Companies are Experiencing?
52% 44% 41%
4%
11% 8%
8% 0%
Early
4% Mid Dec '17
Mid-toLate Mar '18
Late
36% 41%
17% 16%
27%
Trade Wars
Rising Input Costs
9%
25%
20%
31%
8%
Dec '17
2020
After 2020
31%
4%
0% 2019
High
42%
39%
2018
Moderate
Volatile FX
50%
32%
12%
Rising Interest Rates
How Would You Describe Your Current Investment Activity?
42%
40%
45%
23%
No Concern
When Do You Think Industrial Earnings Will Peak? 46%
64%
67%
18% 12%13%
Early-toMid Sep '17
19%
36%
28%31% 26%
Net Buyer
Mar '18 CORBINADVISORS.COM
8%
21% 19%
13%
Net Seller Sep '17
Holding Dec '17
17%
Rotating Mar '18 12
Commentary on Top Concerns
1
Interest Rate Hikes
73%
2
3
Trade Wars
Inflation
Expect YE 2018 Fed Funds Rate to be 2.0% or 2.25%
Buy Side
Sell Side
“1) Materials costs; 2) Trade wars; 3) Geopolitical threats.” Industrials, N. America
“1) Interest rate hikes coming in above expectations; 2) Commodity inflation; 3) Trade wars and rhetoric.” Industrials, N. America
“1) Trade war; 2) Interest rates; 3) Input costs.” Industrials, N. America
“1) Rates; 2) Trade barriers; 3) FX.” Industrials, N. America
“1) Too rapid of a macro improvement; 2) Spiking rates; 3) inflation.”
“1) Proliferation of nuclear technology; 2) Proliferation of night-vision equipment now being used by the Taliban and the implications for our military; 3) Inflationary impacts.” Industrials, N. America
Industrials, N. America
“1) Higher interest rates; 2) Inflation; 3) North Korea.” Industrials, N. America
“1) Trump; 2) Inflation recapture; 3) Slowing growth.” Industrials, N. America
“1) Trade war; 2) FX; 3) Valuation.” Industrials, Europe
“1) Rising interest rates; 2) Rising input costs; 3) Trade wars.”
“1) Tariffs; 2) Rising materials costs; 3) Geopolitical event.”
Industrials, Europe
Generalist, N. America
“1) Trade wars; 2) Interest rates; 3) Irrational exuberance.” Generalist, N. America
“1) President Trump volatility; 2) Fed may tighten rates too fast.” Generalist, N. America
“1) Global trade wars; 2) Spike in commodity costs; 3) Rising interest rates.” Generalist, N. America “1) Interest rates rising; 2) Trade war; 3) Inflation.” Generalist, Europe “1) Interest rates; 2) Trade war; 3) Housing price collapse.” Generalist, Asia CORBINADVISORS.COM
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Around the World: Significant Swings in Economic Growth Views; India and China See Increased Enthusiasm, While Japan, Eurozone and Mexico Outlooks Dampen Global Economy Expectations Over the Next Six Months
U.S.
59%
27%
14% +10 pts
-15 pts Brazil
52%
34%
14% +6 pts
-8 pts India
52%
43%
5% -10 pts
+22 pts Eurozone
48%
48%
4% +4 pts
-30 pts Southeast Asia
38%
57%
5% +1 pt
+2 pts LatinAm (ex-Brazil)
24%
47%
29%
-24 pts China
+13 pts 24%
57%
19% -18 pts
+17 pts Japan
9%
82%
9%
-32 pts
-2 pts
Mexico
71%
29%
-31 pts (from 4Q17 Improving) Improving
+14 pts Staying The Same
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Worsening 14
Global Capex Predicted to Remain Strong, While Construction Bulls Erode Expectations Over the Next Six Months
Global Capex
77%
23%
+3 pts
Worsening, UNCH
Oil & Gas Markets
55%
41%
4%
-37 pts Global PMI
+4 pts 27%
32%
41%
+4 pts Housing/Resi. Const.
-22 pts 23%
64%
13% +5 pts
-25 pts Non-Resi Const.
23%
73%
4%
-35 pts FX Headwinds
UNCH
20%
55%
25% +2 pts
+5 pts Company Input Costs
14%
19%
67%
+3 pts
+9 pts Improving
Staying The Same CORBINADVISORS.COM
Worsening 15
Significant Shifts in Industries Identified
Predicted to Grow Faster than GDP 67%
Defense 50%
Commercial Aerospace
89%
68%
52% 55%
Metals & Mining
Machinery
52%
Materials
44%
Chemicals
44%
79% 77%
21%
Agriculture
Chemicals
34% 13% 32% 13% 21% 0% 17%
Metals & Mining
14% 11%
Water
13% 11%
67%
Machinery
50% 42%
Transportation
63%
Resi. Const.
46% 42%
Building Products
54%
Automotive
Non-resi Const.
58% 52%
Ind. Equipment & Comp.
Dec '17
Predicted to Grow Slower than GDP
Building Products
Mar '18
4% 10% 4% 10% Dec '17
Defense Sentiment Climbs to Above-Record Survey Levels; Commercial Aero Flies Higher
Mar '18
Auto Remains the Laggard for Fifth Consecutive Quarter; Bearish Sentiment Builds in Construction and Chemicals
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ABOUT US
CORBIN ADVISORS
About Us Deep Experience. Deeply Committed. Founded
2007
Team Experience
~200 Years Combined
Location
Hartford, CT (US)
Client Size
$250M to $150B+
Founded in 2007 by Rebecca Corbin
Track record of value creation and committed to the highest quality standards and client satisfaction
Extensive C-suite and board-level advisory experience
Thought leaders: Leading-edge research on investor sentiment and best practices; quarterly surveys regularly featured on CNBC
Not pictured: Catherine Hazzard John Brownell
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Our Proven Methodology We Deliver Insights and Advice Resulting in Measurable Value Creation
Our proprietary approach combines stakeholder research, investor engagement and communication strategies to unlock embedded value. Leveraging deep experience across sectors, market-caps and various company situations, we engage with public companies on both high-level strategy and tactical execution. Our candid advice and actionable recommendations consistently result in value creation. Contact: Jeffrey Goldsmith Jeffrey.Goldsmith@CorbinAdvisors.com CORBINADVISORS.COM
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