|
IF IT’S CORBIN, IT’S ACTIONABLE
4Q17 Earnings Primer Industrial Sentiment Survey January 18, 2018 CORBINADVISORS.COM
|
Inside The Buy-sideÂŽ Industrial Sentiment Survey
Issue Date: January 18, 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: 30 investors and analysts globally; buyside firms manage $1.9 trillion in assets and have $242 billion invested in industrials
4Q17
2017
S&P 500
6.1%
19.4%
S&P Industrial
5.5%
18.5%
Survey timeframe: December 5, 2017 – January 9, 2018
Role
Sector Focus
Region N.A.
31%
37%
Europe 63%
1
Sell Side
The Industrial Sentiment Survey was launched on 06/15/15
17%
69% Asia
Buy Side
73%
Industrials
10%
Generalist
CORBINADVISORS.COM
2
Word Cloud: Frequency of Occurrence
CORBINADVISORS.COM
3
Key Findings: Positive Industrial Sentiment Builds as 2018 Expected to be a Year of Strong Growth and Momentum #1 Strong 2018 Industrial Performance Expected as Record Optimism Continues Nearly 95% of industrial investors and analysts surveyed expect earnings to Meet or Exceed consensus with 54%
forecasting beats; a peak 75% predict sequential improvement following strong results last quarter Management described as increasingly positive; those classifying executive tone as Neutral to Bullish or Bullish now over
90%, a survey high, with 85% expecting stronger 2018 full-year guidance outlooks than 2017 Over 70% characterize sentiment toward industrials as Neutral to Bullish or Bullish, an increase of 12pts from last quarter Continued strength in key performance indicators anticipated in 2018, with nearly 90% expecting EPS expansion and 78%
projecting increased free cash flow generation
#2 Growth Views Shift into Higher Gear Financial professionals nearly unanimously expect revenue growth to improve in 2018, a significant increase from 74% last
quarter Over 50% expect 4.0% to 5.0% organic growth, with 34% now expecting 5.0%+, an increase from 19% QoQ Nearly 75% anticipate global capex and U.S. GDP to improve over the next six months; Eurozone and U.S. continue to see
strongest optimism, while Brazil experiences a slight pullback from last quarter’s record sentiment 76% identify reinvestment as the leading primary choice of excess free cash, raising the bar for continued company
optimization and growth Several Sub-sectors See Significant Spikes in Bullish Sentiment; Investors Report Sustained Investment in
#3 Industrials with Peak Earnings Not Anticipated until 2019
Machinery, Materials and Chemicals claim top spots; Distribution sees largest increase in bullish sentiment QoQ, while
Auto remains the lone laggard 72% believe the industrial cycle is in the Mid-to-Late to Late stage, though fewer than one-third expect industrial earnings
to peak in 2018 73% report holding or increasing industrial positions, with more buyers recorded this quarter CORBINADVISORS.COM
4
Bullish Earnings Sentiment Carries Forward for Second Consecutive Quarter Expectations Regarding 4Q17 Earnings Performance Relative to Consensus
“Improving” PMI Industrial Production
Global Growth 63%
Dec '16 48%
Mar '17 Jun '17 Sep '17
52% 54% 43%
48%
52% 35%
29%
39%
Dec '17
8% Better Than
75%
Expect Sequential Earnings Growth
In Line
93% CORBINADVISORS.COM
13% 4% 5%
7%
Worse Than
Expect In Line to Better Than Consensus Results
5
Revenue and Cash Flow Views at All-time Highs, While Margin Performance Sees Uptick Despite Rising Input Cost Concerns
Key Performance Indicators
83%
80% 80%
Revenue
EPS Growth 84%79%
65%
66%
74%
Wow! 15%
Improving
10%
20% 17% 5%
Staying the Same
10%
15%
8%
0%
Worsening
Improving
Cash Flow 71%
7%
4%
Worsening
Operating Margins
74%
71%
46%
44%
42%
36% 25%
31% 19%
16%
12% 4%
Improving
8%
Staying the Same
56% 48%
19%
17% 15%19%
Staying the Same
25%
33%
Improving
Jun '17
19% 8%
7%
Worsening
Mar '17
50%
48%
Sep '17
CORBINADVISORS.COM
Staying the Same
4%
11%
Worsening
Dec '17 6
Industrials Finally Hitting Their Stride Expectations for Upcoming Quarter Results Versus Consensus 60% 50% 40% 30% 20% 10% 0%
Better Than
Worse Than
EPS Growth
Revenue 100% 80% 60% 40% 20% 0%
100% 80% 60% 40% 20% 0%
Cash Flow
Operating Margins
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
Improving
Worsening
CORBINADVISORS.COM
7
2018 Expectations Through the Roof; Strong Guidance Outlooks Anticipated
Expectations for 2018 Full-year Guidance Outlooks Versus 2017
85%
Expectations for 2018 Versus 2017
Revenue
96%
EPS Growth
4%
89%
Cash Flow
11%
78%
22%
15% 0% Stronger
In Line
Operating Margins
52%
44%
4%
Weaker Improving
CORBINADVISORS.COM
Staying The Same
Worsening
8
Investor Sentiment Improves for Fifth Consecutive Quarter to Record High, Management Tone Described as Elevated with No Bears in Sight
Investor Sentiment 61%
23%
Management Tone 73%
84%
31%
92%
24% 40%
Bullish Neutral to Bullish
38%
Neutral
42%
Neutral to Bearish
60%
Bearish
31%
52%
17%
8%
10%
Sep '17
Dec '17
12%
CORBINADVISORS.COM
4%
4% 4%
Sep '17
Dec '17
9
Commentary on Earnings Expectations Vs. Consensus Better Than – 54%
In Line – 39%
“Stronger global growth.” Buy Side, Generalist, N.
“Seasonal slowdown will offset underlying growth.”
America
Buy Side, Industrials, N. America
“GDP, growing optimism, tax reform legislation.” Buy
“2018 will be better than this year.” Buy Side,
Side, Generalist, N. America
Industrials, N. America
“Leverage is always underestimated.” Buy Side,
“Synchronized global growth.” Buy Side, Industrials,
Industrials, N. America
N. America
“No speedbumps during the quarter and good commentary from conferences we’ve attended.” Sell
“Improving PMIs, industrial production growth, anecdotal.” Sell Side, Generalist, Europe
Side, Generalist, N. America
“Strong industrial backdrop globally.” Sell Side, Industrials, N. America
Worse Than – 7% “Tougher comps, sky-high expectations.” Buy Side, Industrials, N. America
“Volume pricing, limited cost expansion (labor).” Sell “Easy comps, synchronized global growth.” Sell Side,
“Taking a breather and booking one-offs. Investors will likely focus on order intake only and once Q4 is reported, everyone will focus on 2018E.” Sell Side,
Industrials, Asia
Industrials, Europe
Side, Generalist, Europe
CORBINADVISORS.COM
10
Eurozone, U.S. Continue Dominance While Brazil Sees Drop from Strongest Optimism Level Last Quarter Global Economy Expectations Over the Next Six Months
Eurozone
78%
22%
+11 pts
-5 pts
U.S.
74%
22%
+12 pts
-1 pt
Brazil
60%
32%
LatAm (Ex Brazil)
48%
36%
16%
-7 pts
+11 pts 41%
48%
11%
+6 pts Southeast Asia
+1 pt 36%
60%
-6 pts 31%
54%
15%
-4 pts India
UNCH 30%
55%
15%
-10 pts China
7%
ADDITIONAL COUNTRIES OF FOCUS: Russia Switzerland Turkey
4%
-9 pts Mexico
8% -2 pts
-20 pts
Japan
4%
+15 pts 56%
37%
-3 pts
+2 pts Improving
Staying The Same CORBINADVISORS.COM
Worsening 11
Despite Perceived Lofty Valuations, Buyers Increase as Growth Predictions Click Higher Industrial Equity Valuations Classification
QoQ Investment Trends 50%
Dec '16 12%
47%
Mar '17 12%
42%
41%
48%
40% 23%
Jun '17 Sep '17
17%
29%
25%
21%
54% 9%
13%
52%
Dec '17 8%
44%
Under
36%
32%
31%
35%
4%
48%
Fairly
Net Buyer
Over
8%
Net Seller Jul '17
19%
Holding Sep '17
Rotating
Dec '17
Expectations for FY 2018 Organic Growth
54% 38%
31%
19% 17% 6%
0%
2.0%
6% 6% 2.5%
0% 3.0%
12%
6%
3.5% Sep '17
4.0%
19% 17% 6%
4.5%
17% 0%
5.0%
>5.0%
Dec '17
CORBINADVISORS.COM
12
Policy Initiatives Set to Supercharge Steamy Market Tax Reform: Is It Priced into Valuations?
Passage of Infrastructure Investment: Is It Priced into Valuations? Passage
45%
42%
26%
20%
Before
After
0%
13%
0%
Up to 25%
25%
13%
Up to 50%
36%
38%
Up to 75%
13%
31%
Up to 100%
13%
18%
25% 17% 16%
33%35% 25%
Jun '17
Up to 50%
Up to 75%
Sep '17
26% 27%
30%
17%
10%11% 0%
Up to 25%
53%
37%
4%
0%
73%
5%
7%
0%
0%
100%
Dec '17
Up to 25% Jun '17
0%
7%
9% 0%
Up to 50%
Up to 75%
Sep '17
Dec '17
0% 0%
100%
Importance of Republican Policy Initiatives to Continued Economic Growth
88% 65% 23% Very Important
12% Important CORBINADVISORS.COM
Not Important
13
Investors Believe We Are Mid-to-Late in the Industrial Cycle; Peak Earnings Generally Not Expected in 2018 Early
Industrial Cycle Views 44% 41% 25%26%
25%
4% 4%
8%
Early
11%
28% 29% 17%18% 12%
8%
Early-toMid Jun '17
“We had a severe worldwide downturn (the new recession) in 2014 and 2015. Before that, BRIC was in all speeches; now, it is nowhere to be found.” Buy Side, Industrials, N. America
Mid
Mid-toLate
Sep '17
Late
“Energy is going to come back. There is a lot of spending either directly or peripherally related to Energy. There will probably be more M&A with the rates going up. Most of the industrial companies want to do acquisitions but maintain their price discipline, so it has weakened some of the competitive buying.” Buy Side, Industrials, N. America Mid “Recovery has been below-par on a global basis but is now accelerating.” Buy Side, Generalist, N. America
Dec '17
“The housing sector.” Buy Side, Industrials, N. America Mid-to-Late
Predictions for Peak Industrial Earnings
32%
“All signals on green so far. No significant slowdown expected; some industries without much visibility (semis), which are crucial for 2019/2020. It is about order intake dynamics. At the moment, more things can turn sour than sweet.” Sell Side, Industrials, Europe “Length of cycle, global PMIs, tougher comps.” Sell Side, Industrials,
40%
Asia
20% 8%
Late “It’s just long in the tooth.” Sell Side, Generalist, N. America
2018
2019
2020
After 2020
“The long-lasting expansion since the financial crisis. Just being extended by the last recovery of formerly ailing Eurozone member states.” Sell Side, Generalist, Europe
CORBINADVISORS.COM
14
Commentary on Top Concerns
1
Inflation
2
Geopolitical concerns, with emphasis on escalating North Korea tensions
Buy Side
3
D.C. Dysfunction
Sell Side
“1) Geopolitical; 2) Inflation; 3) Problems with administration.”
“1) FX; 2) Politics; 3) China shadow banking system.” Generalist, N.
Generalist, N. America
America
“1) Liberal media creating fear.” Industrials, N. America
“1) Valuation; 2) Price/Cost; 3) China.” Industrials, N. America
“1) Wage inflation; 2) Bad strategy, like ESG mitigation; 3) Little Rocket Man.” Industrials, N. America
Industrials, N. America
“1) Raw materials inflation; 2) Rising interest rates; 3) China uncertainty.” Industrials, N. America
America
“1) Inflation; 2) Interest rate hikes; 3) North Korea.” Industrials, N.
“1) Political.” Industrials, N. America
“1) Rates; 2) Tax/repeat of cash; 3) Harder comps overseas.” “1) Valuations; 2) Price/Cost; 3) Non-Resi cycle.” Industrials, N.
America
“1) Valuations; 2) Input costs; 3) Sentiment/expectations.” Industrials, N. America
“1) Higher producer prices being passed onto the final consumer leading to a salary/wage spiral; 2) Monetary policy staying behind the curve; 3) FX.” Generalist, Europe
“1) Trump recklessness; 2) Congress adding to budget deficits; 3) Interest rates.” Industrials, N. America
“1) Global political idiocy; 2) FX.” Generalist, Europe
“1) China; 2) Debt levels; 3) Dysfunctional D.C.” Industrials, N.
Industrials, Europe
“1) Public debt; 2) Political uncertainty; 3) High equity valuations.”
America
“1) Geopolitical risks; 2) Inflation increase; 3) Commodity price increase.” Generalist, Asia “1) China; 2) Monetary policy; 3) North Korea.” Industrials, Asia
CORBINADVISORS.COM
15
Oil & Gas Nearly Unanimously Expected to Improve; Inflation Causes Concern with Company Input Costs Expectations Over the Next Six Months
Oil & Gas Markets
92%
8%
+21 pts
UNCH
Global Capex
74%
26%
+17 pts
UNCH
U.S. GDP
70%
26%
4%
-1 pt
+4 pts
Non-Resi Const.
58%
38%
4%
-13 pts
Consumer Confidence
-6 pts 52%
44%
4%
NA*
Housing/Resi. Const.
48%
44%
8%
+5 pts
Global PMI
-1 pt 23%
58%
19%
-15 pts
FX Headwinds
UNCH
15%
62%
23%
-23 pts
Company Input Costs
11%
-6 pts 31%
58%
+6 pts
Improving
-13 pts
Staying The Same
Worsening
*New measure CORBINADVISORS.COM
16
Anticipated Infrastructure Spending, Industrial Production Drive Machinery and Materials to Record Levels While Auto Continues to Lag
Predicted to Grow Faster than GDP 48%
Machinery
77%
50%
Chemicals Defense
41% 14%
14%
18% 13% 16% 13%
Water
54%
Transportation Defense Building Products
Dec '17
25%
14% 13%
Non-resi Const. Resi. Const.
58%
57% 50%
Commercial Aerospace
23% 21%
Agriculture
48% 50%
Transportation
Sep '17
81%
40% 52%
Metals & Mining
59% 54%
Automotive
Metals & Mining
67% 67%
Ind. Equipment & Comp. Distribution
79%
38%
Materials
Predicted to Grow Slower than GDP
10% 9% 5% 8% 0% 4% Sep '17
Distribution, Machinery and Materials See Significant Swings (>30pts) in Bullish Sentiment
Dec '17
All Sectors Outside of Auto and Ag See Minimal Bearish Sentiment
CORBINADVISORS.COM
17
Reinvestment Overwhelming Preference Preferred Uses of Cash In Descending Order of Top Two Combined Preferences
Reinvestment
76%
M&A 4%
32%
Buybacks 4%
Dividend Growth
Debt Paydown 4%
24%
25%
12%
21%
16%
16%
4%4%
24%
24%
Dry Powder 4% 13% 4%
Primary Choice
Second
CORBINADVISORS.COM
Third
18
Topics of Interest for Earnings Calls
1
M&A
2
Tax Reform Impact on Capital Spending
“Global growth opportunities.” Generalist, N. America
3
Growth Opportunities
“Use of cash freed up from tax reform.” Industrials, N. America
“Capex.” Industrials, N. America
“Capital allocation and M&A valuations.” Industrials, N.
“Plans for cash reinvestment, amount of tax reform benefits that drop to bottom line.” Industrials, N. America
America
“Data security given the flaws recently announced in Intel chip design.” Generalist, N. America
Generalist, Europe
“Nuance off tax reform on capital spending plans, M&A, etc.” Industrials, N. America
“Top-line growth and development of bottom-up.” “Order intake dynamics, M&A, China exposure, semicycle, disruptive new entrants.” Industrials, Europe “Input cost inflation and pricing.” Industrials, Asia
CORBINADVISORS.COM
19
About Corbin
Deep Experience. Deeply Committed. Founded
2007 by Rebecca Corbin
Senior Team Experience
~200+ Years Combined
Location
Hartford, CT (U.S.)
Client Size
$250M to $150B+ Market Cap
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
CORBINADVISORS.COM
20
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.
If it’s Corbin, it’s Actionable.
Contact: Jeffrey Goldsmith Jeffrey.Goldsmith@CorbinAdvisors.com CORBINADVISORS.COM
21