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IF IT’S CORBIN, IT’S ACTIONABLE
Industrial Sentiment Survey April 13, 2017 CORBINADVISORS.COM
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Inside The Buy-side® Industrial Sentiment Survey
Issue Date: April 13, 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 1Q171
1Q162
S&P 500
5.5%
0.8%
S&P Industrial
4.0%
4.6%
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Survey scope: 25 investors and analysts globally; buy-side firms manage $585B in assets and have $70B invested in Industrials
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Dec. 31, 2016 – Mar. 31, 2017 Dec. 31, 2015 – Mar. 31, 2016
Survey timeframe: Mar. 20 – Apr. 5, 2017
Role
Sector Focus
Region N. America
28%
40% 60%
72%
Asia
Europe Buy Side
88%
Sell Side
Industrials
8%
4%
Generalist
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Word Cloud: Frequency Of Occurrence
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Optimism Abounds As Industrials Build On Strong 4Q16 Momentum #1
Spring Has Sprung: Near Universal Bullish Expectations For Strong Industrial Earnings
More than 95% expect 1Q17 industrial earnings to meet or beat consensus; highest level of positivity since report inception
(Jun. 2015), surpassing last quarter’s then-record high of 92% Despite concerns over input costs, the number of investors expecting margin erosion declined to just 8% from 39% last
quarter Over 80% anticipate continued top- and bottom-line increases, more than doubling from last quarter’s survey Management tone is described as more positive; those classifying executive stances as neutral to bullish or bullish
increased to 84% from 60% last quarter
#2
Trump Proposed Policies Driving Overwhelming Positive Sentiment; Legislation Success Major Swing Factor But Investors Are Optimistic
Most expect the majority of Trump’s policy proposals to be positive for the U.S. economy and pass in 2017; 72% expect
U.S. GDP to improve over the next 6 months 70% suggest the infrastructure bill, if passed, will take between one to two years to benefit companies; 74% expect a green
light Still, primary concerns voiced are: 1) ability to pass legislation; 2) valuations; and 3) Trump
#3
#TrumpTrade In Full Bloom; Investors Combing Over Sub-sector Opportunities
Defense, Industrial Equipment & Components and Machinery see significant spikes in bullish sentiment; short-cycle
product orders and services expected to increase Auto sees the most bearish sentiment and registers the biggest spike in bearish calls, followed closely by Water; Ag
remains out of favor CORBIN ADVISORS
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Industrial Earnings Largely Expected To Meet or Beat Consensus; Holy Optimism, Batman!
Expectations Regarding 1Q Earnings Performance Relative To Consensus
58%
Jun '16
48%
Sep '16 Dec '16 Mar '17
63%
50%
48% 34%
29% 16%
21%
21% 8%
Better Than
In Line
4%
Worse Than
56% Describe 4Q and FY 2016
88% Report 2017 outlooks were
results as in line with expectations
in line with expectations
Most bullish earnings sentiment registered since survey inception (Jun. 2015)
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On Earnings Expectations Vs. Consensus Better Than
In Line
“Accelerated growth, strong fundamentals and a pick-up in growth outside of the better optimism from policy change.”
“Businesses are more profitable.” Buy Side, Generalist, N.A.
Buy Side, Industrials, N.A.
“Expectations may have gotten ahead of reality as it pertains to reflation and corporate tax reform.” Buy Side,
“Improving industrial demand.” Buy Side, Industrials, N.A.
Generalist, N.A.
“ISM and distributor monthly sales improvements and EMR orders as well as cautious but optimistic commentary from Industrial management teams.” Buy Side, Generalist, N.A.
“Lack of bad weather in the U.S. and confidence in a probusiness U.S. administration.” Buy Side, Generalist, Asia “Seasonal slowdown in business.” Sell Side, Generalist, N.A.
“Pick up in short-cycle MRO activity.” Sell Side, Industrials, N.A.
“Strong ISM, survey work.” Sell Side, Industrials, N.A.
“Seasonally usually lower QoQ. Short-cycle demand improvement not likely fully reflected in consensus.” Sell Side, Industrials, N.A.
“Orders have begun to improve but generally industrials are not short-cycle (weeks or months) but rather quarters. As a result, earnings are likely to begin to materially reaccelerate in 2H17.” Sell Side, Industrials, N.A.
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Revenue And EPS Expectations Propel To All-time Highs While Margins See Significant Improvement Revenue
84%
80%
37% 30%
45% 41% 41%
19%
40%
EPS Growth
46% 37% 36%
40%35%39%
25%22%
15%
23%
Staying the Same
Worsening
Improving
Cash Flow
35%
36% 36% 23%
23%25%
19% 16%
48%
46% 30%
36%
Staying the Same
Improving
Worsening
Jun '16
35%
39% 31%
8%
4% Improving
Worsening
Operating Margins 44%
40%
8%
Staying the Same
58% 45% 48% 37% 38%
25%
8%
5% Improving
19%
Sep '16
Dec '16
CORBIN ADVISORS
Staying the Same
Worsening
Mar '17
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Short-cycle Products Expected To Accelerate; Long-cycle Products And Services Remain Strong
Short-cycle Products
3% 30%
4% 7% 7%
5%
Long-cycle Products
4%
15%
44%
15%
14%
30%
40%
4% 29%
35%
63%
55%
39%
75%
35%
72%
71% 26%
57% 52%
29%
10%
30%
37%
31%
Services
35% 11%
20%
Jun '16 Sep '16 Dec '16 Mar '17
Strongly Decelerate
50%
46%
26% 13%
14%
3%
Jun '16 Sep '16 Dec '16 Mar '17
Decelerate Somewhat
Remain the Same
CORBIN ADVISORS
10% 4% Jun '16 Sep '16 Dec '16 Mar '17
Accelerate Somewhat
Strongly Accelerate
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Management Tone Increasingly More Positive And Outpacing Investor Sentiment
Investor Sentiment
Management Tone
11%
12% 24% Bullish
42% 32%
60%
Neutral to Bullish Neutral
72%
Neutral to Bearish Bearish 30%
24%
20%
17%
20%
20%
12% 4%
Dec '16
Mar '17
Dec '16
CORBIN ADVISORS
Mar '17
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Views On Valuations Holding Steady… How Would You Classify Industrial Valuations?
88% 44%
Sep '16
47%
48%
48%
41%
40%
Dec '16 Mar '17 8%
12%
12%
Under
Fairly
Over
Undervalued
Fairly Valued
Overvalued
“EPS revisions will make industrials look cheap.” Buy Side, Industrials, N.A.
“Bottoming fundamentals can support higher multiples.” Buy Side, Industrials,
“Above-average valuations late in the cycle with limited likelihood of significant positive surprises over the next 24 mos.” Buy Side, Industrials,
N.A.
“2017 S&P 500 P/E will likely move to 20x before earnings begin to accelerate starting in 2H17 and significantly accelerate in 2018.” Sell Side, Industrials, N.A.
“Look expensive on P/E on cyclically weak earnings but are fair/slightly cheap on FCF yield.” Buy Side, Generalist, N.A.
N.A.
“Expectations for margin expansion are elevated.” Buy Side, Industrials, N.A.
“Lack of full confidence in strength of recovery.” Buy Side, Generalist, N.A.
“1-2 year likely to disappoint.” Sell Side, Industrials, N.A.
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…With Investors Picking Horses Versus Buying Wholesale How Would You Describe Your Recent Activity In Industrials? 54% Jun '16* Sep '16 Dec '16*
41% 29% 24% 19%
33%
29% 18%
18% 8%
Mar '17 Net Buyer
38%
18%
26% 19%20%
Holding
Rotating
0%
Net Seller
Net Buying
Holding
Rotating
“Expect the sector to benefit greatly on tax and infrastructure changes.” Sell Side,
“A negative is that valuations are not attractive; a positive is the hope for policy stimulus.” Sell Side, Industrials, N.A.
“Have recently rotated out of very cyclical industrials that have run aggressively post-election into laggards where we have a view on company-specific fundamental drivers playing out.” Buy
Generalist, N.A.
Side, Generalist, N.A.
If You Plan To Increase Your Industrial Sector Exposure, What Would You Be Buying? 27%
27% 13%
Broad-based
Early-cycle
Mid-cycle
20%
Late-cycle
13%
Other
*Jun ‘16 and Dec ‘16 values do not equal 100% due to 3% “Liquidating” not displayed on chart CORBIN ADVISORS
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Investors Anticipate Relatively Modest GDP Growth In 2017; Industrial Expectations Remain In Line With Broader Economy
What Are Your Predictions For 2017 U.S. GDP Growth?
Top Concerns
1. Ability to pass legislation
40%
2. Valuations 15% 5% 1.0%
15%
5% 1.5%
15%
3. Trump
5% 2.0%
2.5%
3.0%
3.5%
Do Not Focus On GDP
“Structural changes in how we run U.S. economy don't get passed.” Sell Side, Industrials, N.A. “Lack of policy progress from Washington.” Sell Side, Industrials, N.A.
73% Expect industrials to achieve between 2.0% and 3.0% organic growth in 2017
“Valuations as investors return to the stock market. Earnings must validate enthusiasm.” Buy Side, Industrials, N.A.
“Unpredictable president.” Buy Side, Industrials, N.A.
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U.S. Sentiment Remains Strong; Europe Sees The Light At China’s Expense Over The Next Six Months, What Are Your Expectations For The Following Economies?
U.S.
80%
16%
4%
+3 pts
-2 pts
India
67%
33%
+10 pts
-9 pts
Eurozone
56%
40%
4%
+24 pts
-10 pts
Brazil
52%
28%
20%
+9 pts
+9 pts
Southeast Asia
42%
50%
8%
+2 pts
-6 pts
LatAm (ex-Brazil)
25%
67%
8%
+2 pts
Japan
-1 pt 21%
75%
4%
-5 pts
Mexico
-1 pt 20%
28%
52%
+12 pts
China
+3 pts
16%
60%
24%
-24 pts
-2 pts
Improving
Staying The Same CORBIN ADVISORS
Worsening 13
Building Boom: Expectations For Construction And Capex Increase; Input Cost Inflation Winds Blowing Over The Next Six Months, Do You See The Following Improving, Staying The Same Or Worsening?
U.S. GDP
72%
24%
+11 pts
+1 pt
Oil & Gas Markets
70%
30%
-7 pts
-4 pts
Global Capex
65%
25%
Non-Resi Const.
55%
45% -12 pts
+9 pts
Housing/Resi. Const.
45%
50%
5% -6 pts
-9 pts 30%
35%
35% +27 pts
-1 pt
Company Input Costs
10% -5 pts
+38 pts
Global PMI
4%
10%
25%
65% -3 pts
-6 pts
FX Headwinds
84%
16% -49 pts
-4 pts
Improving
Staying The Same CORBIN ADVISORS
Worsening 14
#TrumpTrade: Most Proposed Policies Expected To Pass This Year How Impactful Will The Following Be On The U.S. Economy? Likelihood Of Passing In 2017
U.S. Corporate Tax Cut
90%
100%
U.S. Personal Tax Cut
82%
Repatriation
81%
76%
18% 5%
14%
86%
Immediate Depreciation Of Capex
79%
17%
4%
80%
Infrastructure Expansion Program
79%
17%
4%
74%
Border Adjustment Tax
69%
16%
15%
38%
Interest Non-deductibility
66%
19%
15%
29%
Large Defense Spend Increase
48%
Positive
Neutral
CORBIN ADVISORS
48%
4%
70%
Negative
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Must Of Anticipated Infrastructure Investment Already Priced In; Several Years Before Benefits Reach The Bottom Line
How Much Is The Anticipated Infrastructure Investment Currently Priced Into Valuations?
If Passed, When Do You Expect To See Industrial Companies Directly Benefit From The Anticipated Infrastructure Spending Program?
80% 40%
70%
40%
15%
25% 5%
5%
0% 0%
Up to 25%
Up to 50%
Up to 75%
100%
Within 1 Year
CORBIN ADVISORS
1-2 Years
3+ Years
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Auto Continues To Lose Traction While Trump Trade Elevates Select Sub-sectors
Predicted To Grow Faster Than GDP
Predicted To Grow Slower Than GDP
55%
Defense
74% 28%
Ind. Equip. & Comp.
65% 58% 55% 58%
Non-resi Constr.
53% 25%
Machinery
47% Dec '16
58% 56% 17%
Water
Resi Constr.
43%
Comm. Aero
68%
Agriculture
61%
Building Products
43%
Automotive
38% 5% 23%
Comm. Aero
19% 21%
Metals & Mining
14% 21% Dec '16
Mar '17
Industrial Equipment & Components Sees Biggest Jump In Bullish Sentiment And Defense Hits An All-time High
Mar '17
Auto Sees Most Bearish Sentiment While Conviction In Water Sees Continued Evaporation
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