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IF IT’S CORBIN, IT’S ACTIONABLE
2Q18 Earnings Primer Industrial Sentiment Survey July 13, 2018 CORBINADVISORS.COM
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Inside The Buy-sideÂŽ Industrial Sentiment Survey
Issue Date: July 13, 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* 2Q18
YTD
(0.5%)
(2.0%)
NASDAQ
6.3%
8.1%
Scope: 26 investors and analysts globally; buy-side firms manage $1.0 trillion in assets and have $111 billion invested in Industrials
S&P 500
2.9%
1.7%
(3.7%)
(5.6%)
8.6%
7.0%
Timeframe: Jun. 5 – 25, 2018
* As of Jun. 29, 2018
Role
Dow Jones
S&P Industrial Russell 2000
Sector Focus
Region
9% 26%
36% 64%
Buy Side
1
Sell Side
The Industrial Sentiment Survey was first published in June 2015
13%
74%
Industrials
Generalist
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78%
N. America
Europe
Asia
2
Word Cloud: Frequency of Occurrence
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Key Findings: Upbeat Industrial Executive Tone Keeps Investor Expectations High for Continued Strong Company Performance #1
Record-level Perceived Management Tone Gives Investors Confidence in Ability to Offset Headwinds
64% describe management tone as outright Bullish, significantly above the previous record of 40% in 4Q17 95% expect earnings to meet or beat consensus with 65% predicting sequential improvement Investor confidence in Revenue expansion reaches all-time high, with 2018 Organic Growth expectations remaining at 5.0%+ Despite ~50% expecting input costs and FX volatility to worsen over the next six months, fewer expect these headwinds to
have a significant negative impact on growth momentum Nearly 60% expect Operating Margins to improve this quarter, up from only 33% in 1Q18, as over 75% of investors express
confidence in companies’ ability to offset cost inflation and tariff impacts through pricing actions Views on when the Industrial cycle will peak push out to 2020+
#2
Anticipated Oil & Gas Price Improvement Seen as Near-term Upside Driver for Industrials with Energy Exposure though Majority of Investors Remain Neutral and/or Negative over the Longer-term
80% anticipate Oil & Gas markets to improve over the next six months, an increase of 25% sequentially While 65% express Positive near-term sentiment toward Industrials with energy exposure, an aggregate 82% are Neutral
or Negative over the long-term The vast majority, 87%, report being comfortable with Industrials having up to 20% energy exposure as a % of total sales
#3
Massive Shifts in Sector Sentiment Identified as Investment Rotation Nearly Doubles QoQ
Nearly 35% report Rotating within Industrials, more than double that of 1Q18; 38% are Holding Defense sees the highest level of bullish sentiment; 87% expect the sector to Grow Faster than GDP – a near-record for
the highest sub-sector sentiment level ever recorded Non-Resi Construction bulls double QoQ while Commercial Aerospace and Metals & Mining remain among top picks Auto is again the biggest laggard while bears rush into Water, nearly quadrupling to 41% from only 11% last quarter CORBINADVISORS.COM
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Global Growth Drives Continued Expectations for Strong Performance while Pricing Actions are Expected to Largely Offset Rising Input Costs Expectations Regarding 2Q18 Earnings Performance Relative to Consensus
Global Growth Price Increases Sep '17
52% 54% 50% 50%
Dec '17
46% 45% 35%
39%
Mar '18 Jun '18
13% 7% Better Than
65%
Expect Sequential Earnings Growth
In Line
95%
vs. 60% Last Quarter
4%
5%
Worse Than
Expect In Line to Better Than Consensus Results vs. 96% Last Quarter
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Investor Confidence in Revenue Growth Accelerates to All-time High and Operating Margin Concerns Ease KPI Trends – Expectations EPS Growth
Revenue 83%
88% 75%
74%
65%
66%
20% 17%
15% 12%
15%
Staying the Same
67%
15%
10% 0%
Improving
77%
19%
29% 19%
19% 7% 4% 4%
0% Improving
Worsening
Cash Flow
Staying the Same
Worsening
Operating Margins
74% 54% 46%
46%
42%
38% 19%
Improving
58%
56%
50%
Staying the Same
31% 12%
33%
50%
42% 33%
31% 19%
7% 8% 4% Improving
Worsening
Sep '17
Dec '17
Mar '18
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Staying the Same
25% 11%
11%
Worsening
Jun '18 6
Commentary on Earnings Expectations Vs. Consensus Better Than – 50%
In Line – 45%
“Macro stronger than expected.” Buy Side, Industrials, N. America
“Industrial markets continue to recover and pricing realization expected.” Buy Side, Industrials, N. America
“Non-resi spending.” Buy Side, Industrials, N. America
“PMI momentum.” Sell Side, Industrials, N. America
“Revenue growth and price increases.” Buy Side,
Worse Than – 5%
Generalist, N. America
“Lower taxes, better global growth, good price/cost mix and ability to get price increases passed on to customers.” Buy Side, Generalist, N. America
“Slowdown in growth rates.” Buy Side, Industrials, Europe
“Improving economy.” Buy Side, Generalist, N. America “Price increases taking effect to offset raw material cost inflation.” Sell Side, Industrials, N. America “Better handle on price/cost.” Sell Side, Industrials, N. America
“Have to emphasize that there are some sectors that are going to be hurt by trade wars.” Sell Side, Industrials, N. America
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Topics of Interest for 2Q18 Earnings Calls
1
Price/Cost Dynamics, Impact on Margins
2
Demand Environment
3
Capex Plans
48% Expect 3.0% 2018 U.S. GDP Buy Side
Sell Side
“Materials costs, inflation and western European
“Contingency plans for extreme weather events driven by climate change.” Industrials, N. America
demand.” Industrials, N. America “How are they positioning their companies to grow above end markets?” Industrials, N. America
“AI.” Industrials, N. America
“Ability to get pricing and mid-term (2-3 years) market expectations.” Industrials, N. America
Asia
“Rising commodity prices and pricing pressure.” Industrials,
“Margins and pricing.” Industrials, N. America “Price/cost, organic growth, regional views of globe, industries of strength, signs of weakness, capex plans and appetite for M&A.” Generalist, N. America “Capital allocation (M&A, share repurchase) - REMAIN DISCIPLINED!” Generalist, N. America
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Perception of Management Tone the Most Positive Since Survey Inception; While Still Upbeat, Investor Sentiment Slightly More Cautious
Investor Sentiment
83%
22%
Management Tone
76% 24%
92%
96% 39%
Bullish 64%
Neutral to Bullish Neutral 61%
52%
Neutral to Bearish Bearish 57% 28%
8% 17% Mar '18
16% Jun '18
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4%
4% 4%
Mar '18
Jun '18
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Positive Industrial Trends Identified by Respondents
1
Strong Global Demand
2
Increased Capex
Buy Side
3
Aging Infrastructure
Sell Side
“Synchronized global growth and confidence.” Industrials, N. America
“Strong demand and cost recovery with higher air fares.” Industrials, N. America
“Improving end markets and capex rebound underappreciated.” Industrials, N. America
“Blockchain, e-commerce, B2B and infrastructure.” Industrials, N. America
“Strong demand, better handle on price/cost and better valuations vs. beginning of the year.” Industrials, N. America “Infrastructure demand and marginal improvement in capex.”
“Increase in capex spending, long-cycle exposure and oil & gas.” Industrials, N. America
Industrials, N. America
“Volume growth, sustained demand and low per capita consumption.”
“Global growth, inflation and mid-point of cycle.” Industrials, N. America
Industrials, Asia
“5G, autonomous driving and AI.” Industrials, N. America
“Good management and capex.” Industrials, N. America “Aging infrastructure, movement toward themes like 3D printing, internet of things, more automation and consumables to support heavy industries, such as mining and oil & gas extraction.” Generalist, N. America
“Renewed capital spending, deregulation and increasing business confidence.” Industrials, Europe
Placing Greater Emphasis on Companies that 61% Are Are More Prepared to Address Digital Disruption
“Accelerating organic growth, M&A and capital allocation improving.” Industrials, Europe
“Stronger organic growth, more efficient cost structure and M&A.” Industrials, Europe CORBINADVISORS.COM
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Sector Rotation in Play; Companies with Meaningful Organic Growth and Strong Balance Sheets Should Outperform Industrial Equity Valuation Classification
Expectations for 2018 Organic Growth
58%
21%
21%
Under
Fairly
25% 18%
13%13% 0%
4%
0%
<3.0%
Over
3.0%
4%
3.5%
4.0%
31%
1.5x
2.0x
2.5x
5.0%
>5.0%
Jun '18
13%
3.0x
8% Net Buyer
33% 19% 17%
13% 4% Net Seller
Dec '17 CORBINADVISORS.COM
38% 31%
25%
7% 1.0x
4.5%
42%
39% 17%
4%
How Would You Describe Your Current Investment Activity?
42%
21%
18% 0%
Mar '18
Ideal Net Debt-to-EBITDA Ratio
39% 31% 31%
Holding Mar '18
Rotating
Jun '18 11
Investors Still Believe We Are Mid or Mid-to-Late in the Industrial Cycle; Peak Earnings Expectations Pushed Out to 2020+ Where Are We in the Industrial Cycle? 52% 44% 28% 31% 8% 0%
4%
Early
8%
4%
36%
44%
12% 13%
8%
Early-toMid
Mid Dec '17
Mid-toLate
Mar '18
8%
Late
Jun '18
When Do You Think Industrial Earnings Will Peak?
40%
46%
42%
32%
12%
32%
12%
20%
16% 8%
8%
0% 0% Already Peaked
32%
0% 2H18
2019 Dec '17
Mar '18
2020
After 2020
Jun '18
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Despite Headline-driven Volatility, Concerns Lessen amid Confidence in Management Concern Levels on Positive Growth Momentum Trade Wars
Mar '18
16% 17%
Jun '18
32%
Mar '18 9%
67%
28%
No Concern
60%
Rising Input Costs
Jun '18
40%
Moderate
High
Express High Concern about Tariffs
Jun '18
45%
20% No Concern
8%
64%
52%
No Concern
76%
40% Moderate
High
Are Somewhat to Very Confident in Companiesâ&#x20AC;&#x2122; Ability to Largely Offset Cost Inflation and/or Tariff Impacts through Pricing Actions
Rising Interest Rates
Volatile FX
Mar '18
27%
36%
44%
19%
Jun '18
36% Moderate
Mar '18
High
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23%
41%
36%
36%
48%
16%
No Concern
Moderate
High
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Top Concerns – Unaided
1
Trade Wars
2
3
Inflation
Cycle Peak
Buy Side
Sell Side
“Cycle and trade war.” Industrials, N. America
“Tariffs, debt and rates.” Industrials, N. America
“Inflationary costs and timing of cycle peak.” Industrials, N. America
“Trade wars, higher interest rates and focus on specific businesses.” Industrials, N. America
“Rising inflation and Western Europe GDP growth.” Industrials, N. America
“Trade wars, inflation and cycle slowing.” Industrials, N. America
“Democrat comeback, war with North Korea and breakdown of Europe.” Industrials, N. America
“Trade wars and interest rates.” Industrials, N. America
“Lack of experience in the Treasury and Fed and an unpredictable president, inflation triggering an interest rate overshoot that chokes off growth and excessive wage growth leading to inflation due to tight labor markets.” Generalist, N. America
“Rising commodity prices and pricing pressure.” Industrials, Asia
“Trade wars and inflation.” Generalist, N. America “Valuation, labor inflation and trade war.” Generalist, N. America “Trade relations, commodity prices and interest rates.” Generalist, N. America
“Macro shock, price/cost and trade.” Industrials, Europe “Valuation, inflation and trade war.” Industrials, Europe “Cost inflation, lead indicators rolling and valuation.” Industrials, Europe CORBINADVISORS.COM
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Around the World: Southeast Asia and India See Increased Enthusiasm, While Eurozone, Brazil and U.S. Views Soften Global Economy Expectations over the Next Six Months
India
54%
38%
8%
+3 pts
+2 pts U.S.
50%
42%
8%
-6 pts
-9 pts Southeast Asia
50%
50%
-5 pts
+12 pts Brazil
39%
48%
13%
-1 pt
-13 pts Eurozone
29%
46%
25%
+21 pts
-19 pts LatinAm (ex-Brazil)
26%
65%
9%
+2 pts China
-20 pts 25%
50%
25%
+6 pts
+1 pt Mexico
25%
54%
21%
+25 pts Japan
-8 pts
8%
92%
-1 pt
(From 1Q18 worsening, -9 pts) Improving
Staying The Same CORBINADVISORS.COM
Worsening 15
Investors Tap into Oil & Gas Markets with Enthusiasmâ&#x20AC;¦For Now Expectations over the Next Six Months
Oil & Gas Markets
80%
20%
+25 pts
Worsening, -4 pts
Global Capex
68%
28%
4%
-9 pts
+4 pts
Non-Resi Const.
46%
50%
4%
+23 pts Housing/Resi. Const.
UNCH 24%
56%
20%
+7 pts
+1 pt Global PMI
12%
60%
28%
-15 pts Company Input Costs
12%
-13 pts 36%
52%
-15 pts
-2 pts FX Headwinds
8%
46%
46%
-12 pts
+21 pts Improving
Staying The Same CORBINADVISORS.COM
Worsening 16
While Companies with Energy Exposure Should Benefit Near Term, Respondents Question Longer-term Rationale and Favor Limited Exposure How Would You Classify Your Stance toward Industrials with Exposure to Energy?
Short-term Stance Positive “Higher oil, other energy projects.” Buy Side, Industrials, N. America
4%
14%
“Crude price increase.” Buy Side, Generalist, N. America
31%
“Higher average oil.” Sell Side, Industrials, N. America 68%
“Higher capex as rig counts go up.” Sell Side, Industrials, N. America
65%
Neutral “I am more positive than before on energy because the stocks have not performed as well previously.” Industrials, Europe
18% Short-term Stance
Long-term Stance
Long-term Stance Positive
Neutral
Negative
Positive “We will have another tight supply/demand situation.” Buy Side,
What Threshold (%) Are You Comfortable with an Industrials' Portfolio Exposure to Energy?
Industrials, N. America
“A lot of demand from developing countries.” Sell Side, Industrials, N. America
48%
Neutral 22%
“When the global economy slows, these two sectors feel the pain more than defensive sectors.” Buy Side, Generalist, N. America
17% 4%
10%
15%
20%
30%
9%
“Oil/gas prices in structural decline (renewables, energy efficiency, technology).” Buy Side, Generalist, N. America
35% CORBINADVISORS.COM
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Significant Shifts in Sentiment Identified: Non-Resi Sees Sharp Increase in Bulls and Commensurate Decrease in Bears While Water Sees Some Choppiness
Predicted to Grow Faster than GDP
Predicted to Grow Slower than GDP 89% 87%
Defense 68% 67%
Commercial Aerospace
52% 61%
Resi. Const.
Ind. Equip. & Comp.
52% 61%
Machinery
42% 26%
Non-Resi Const.
Transportation
55%
Ind. Equip. & Comp.
52% 44% 48%
Chemicals
Building Products
44% 45%
Materials Mar '18
11% 41% 34% 32%
Agriculture
Machinery
Transportation
52%
Water
55% 64%
Metals & Mining
63%
Automotive
Non-resi Const.
Jun '18
21% 30% 10% 17% 5% 15% 0% 13% 10% 13% 32% 13% Mar '18
Defense Maintains Stronghold, While Non-Resi Builds Positive Sentiment
Jun '18
Auto Remains the Laggard for Sixth Consecutive Quarter; Bears Find Water
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