Inside The Buy-side Earnings Primer 1Q16 by Corbin Advisors

INSIDE THE BUY-SIDE速 1Q16 EARNINGS PRIMER APRIL 13, 2016

www.corbinperception.com

INSIDE THE BUY-SIDE® 1Q16 EARNINGS PRIMER

Inside The Buy Side®

• Every quarter, we survey institutional investors on topics pertaining to the upcoming earnings season, global economy and market drivers

ISSUE

DATE:

APRIL 13, 2016

Market Performance 1Q16

OneOne-Year1

• We share our research broadly with executives/investor relations (IR) professionals and investors

DJIA

1.49%

(0.51%)

NASDAQ

(2.75%)

(0.63%)

S&P 500

0.77%

(0.39%)

• Survey scope: 60 investors globally managing over $580 billion in assets

Russell 2000

(1.92%)

(11.07%)

As of 3’31’16

• Survey timeframe: March 15 to April 4, 2016

By Sector Generalist Multi Technology Industrial REIT Financial Healthcare Materials P/E

By Region

By Style

48% 15% 12% 12% 5% 2% 2% 2% 2%

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N. America

65%

Value

25%

GARP Europe Asia Pacific

22% 10%

Hedge Fund Core Growth Growth

Latin America

19% 14% 12% 8%

Other Follow us @CorbinResearch

22% 2

QUARTERLY INVESTOR SENTIMENT SURVEY – KEY FINDINGS Negative Sentiment Ebbs And Funds Flow But Bears Still Posturing

Inside The Buy Side®

Finding #1: Investor sentiment has stabilized; polled investors largely expect earnings results in line with consensus but concerns on the economic landscape remain pronounced •

1Q EPS, FCF and organic growth predicted to remain the same quarter over quarter; margins still seen as under pressure

•

40% continue to predict a U.S. recession in 2017, suggesting we are in late stages of a prolonged recovery

•

China banking system and economy, global capex and refugee crisis are predicted to worsen

Finding #2: Shifts in sector sentiment pronounced; investors sour on financials in favor of industrials and energy Finding #3: Global views flip-flop and the U.S. continues to be a bright spot…for now •

Investors globally continue to be most bullish on the U.S.; at 46%, it is more than double the sentiment of the next “strongest” country - India

•

U.S. resi/non-resi construction and consumer spending expected to improve

Finding #4: Presidential election is the new X factor •

57% affirm lack of clarity is negatively impacting markets

•

Kasich-led White House would be most favorable to markets; Trump perceived as second worst behind Sanders

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EXPECTATIONS HAVE SEEMINGLY RESET AND VALUATIONS SEEN AS COMPELLING After Three Quarters Of Growing Concern, Investors Largely Expect Stabilization Highest level of bearish sentiment in 13 quarters

57%

45%

Inside The Buy Side®

Better Than In Line

37% 33% 30%

32% 23%

43% 28%

27%

30%

15%

Worse Than

Mar '15

Sep '15

Dec '15

Mar '16

Drilling into geographic views on earnings… •

Weakest outlook from European-based investors, 38% of whom continue to brace for worse than consensus results

•

Asia-based investors expecting a disappointing quarter has dropped significantly to 33% from 84% last survey; half expect an in line quarter

•

U.S. investors are also less downbeat, with most expecting in line to better than consensus earnings; 75% versus 43% last quarter www.corbinperception.com

KEY PERFORMANCE METRICS SEEN AS STABILIZING; MARGINS IN FOCUS AND PREDICTED TO BE PRESSURED Organic Growth

EPS Growth 51% 45%

61% 51%

Inside The Buy Side®

39% 22% 22% 16%

23%

Improving

Staying the Same

39%

30%

41% 41% 36%

34%

23%

27%

14%

Worsening

Improving

Staying the Same

Worsening

Operating Margins

Free Cash Flow

35%

35% 36% 32%

39%40%

24% 20%

39% 31%32%

28%

24%

55% 48% 40%

13%14%

Improving

Staying the Same

Sep ‘15 www.corbinperception.com

Improving

Worsening

Dec ‘15

Staying the Same

Worsening

Mar ‘16 Follow us @CorbinResearch

Inside The Buy Side®

STRAIGHT FROM THE BUY SIDE: ON EARNINGS EXPECTATIONS Better Than

In Line

Worse Than

“EUR/USD exchange rate, commodity contracts reset at Jan. 1 and demand was better in March.” Sell Side, Side, Industrials | N.A.

“Slightly easier comps on weather related expenses.” Sell

“Higher credit costs and limited margin expansion will pressure results.” Sell Side, Financials | N.A.

“Strength in gold in 1Q16 vs. 4Q15.” Sell Side, Materials | N.A. “A slight improvement in economic pulse, low bar expectations.” Yield, Yield, Generalist | Europe

“Cautious guidance.” Sell Side, Financials | N.A. N.A.

“FX headwinds abating.” Buy Side, Generalist | N.A.

Side, REIT | N.A.

“Data shows economic strength in many areas. Seems like the market is overly negative and not looking at the facts.” GARP, GARP,

“Weak manufacturing globally.” GARP, GARP, Industrials | N.A.

“It’s cutting everywhere!” GARP, GARP,

Multi | N.A.

Multi | Europe

“There is modest growth.” Core

“1. Weak export demand translating into weakness in materials, machinery and industrials. 2. Skittish consumer; further erosion of middle and lower end buying power. 3. Wild ride on Wall Street. 4. Housing historically was the lever that went from interest rates to economic activity. It is bent at best if not broken. 5. Qualified labor (skilled and motivated) is starting to become very difficult to find in many industry groups.”

Value, Generalist | N.A.

Core Growth, Generalist | N.A. www.corbinperception.com

WHILE EXPECTATIONS HAVE BEEN RESET, SENTIMENT DIVERGES Investors Divided On Growth; Glass Half Full Or Half Empty 45%

41%

36%

Inside The Buy Side®

Sep '15

29% 25%

Dec '15

25% 20%

24% 19%

Mar '16

13% 3%

6% 5%

Bullish

2% Neutral to Bullish

Neutral

Neutral to Bearish

Bearish

“Macro issues concern us – business conditions remains solid.” Sell Side, REIT | N.A.

“Macroeconomic headwinds.” Core Value, Generalist |

“The rotation indicates that positioning is too cautious.” Yield, Generalist | Europe

“Lack of growth catalyst.” Core Growth, Generalist | N.A.

“U.S. expansion.” Hedge Fund, Generalist | N.A. N.A. “Pick up in global growth.” Growth, Generalist | Asia “There is modest growth.” Core Value, Generalist | N.A. www.corbinperception.com

Asia

“Global GDP outlook is lowered.” Value, Value, P/E | Europe

“Margin contraction/deflation.” Growth, Generalist | Asia “Weak global growth, dis-deflation, political uncertainty.” Core Value, Generalist | N.A. Follow us @CorbinResearch

SECTOR ROTATIONS AND INFLECTION POINTS ABOUND

Technology

52% 41% 38%

Cons. Staples

Inside The Buy Side速

62%

39% 36%

Healthcare

34% 36%

Cons. Disc. 16%

Industrials Bldg. Pdcts. Previous

38%

Current

After Increasingly Bearishness Sentiment Since 3Q14, 3Q14, Investors Finally Turn Upbeat On Industrials www.corbinperception.com

Materials

Industrials

55%

33% 29%

Utilities Healthcare

41% 34%

13%

Energy

29% 29%

22%

Financials

27% 24%

45%

12% Previous

47%

Current

Investors Growing More Bearish On Financials And Healthcare; Materials And Energy Finally Feeling Some Love Follow us @CorbinResearch

SECTOR SENTIMENT TRENDS Financial

Inside The Buy Side速

Energy 80%

80%

60%

40%

20%

Bulls

Bears

Industrial

Materials

80%

60%

40%

20%

Bulls

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Bears

Bulls

Bears

SECTOR SENTIMENT TRENDS

Inside The Buy Side速

Technology

Consumer Staples

80%

60%

40%

20%

Bulls

Bears

Bulls

Consumer Discretionary

Healthcare

80%

60%

40%

20%

Bulls

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Bears

Bulls

Bears

STRAIGHT FROM THE BUY SIDE: ON SECTORS BULLS

“Favoring sectors with geographic revenue diversification (energy, materials, utilities).” Fund of Funds, Multi | LatAm

Inside The Buy Side®

“In Brazil, large banks are doing well; big profits and high ROEs. Consumer staples are more of a defensive play.” Core Value, Generalist | LatAm “Industrials and building have lagged and are starting to rebound due to need. Consumer staples has pent up demand and tech is evolving.” Core Value, Generalist | N.A.

“Low interest rates; oversupply of commodities, pricing pressure for health care.” Core Value, Generalist | N.A.

BEARS

“Technology spending lacks a catalyst in terms of product. Certain subsectors will do well, but overall the industry has reached maturity and saturation.” Core Growth, Generalist | N.A.

“Utilities and telecom overvalued due to interest rates. Healthcare has gotten ahead of itself. Materials need China, which uses 50% of all materials.” Core Value, Generalist | N.A.

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NOT OUT OF THE WOODS YET…RECESSION FEARS STILL LOOM When Do You Think The U.S. Will Have Its Next Recession?

Are You Placing More Weight On Balance Sheet Strength?

Inside The Buy Side®

41% 40% 2016 U.S. U.S. GDP Expectation: 2.2%

89% 22%24% 14%16%

57% 43% 11%

16%

Dec '15

Mar '16

7% 0% 2016

2017 Dec '15

2018

3+ years

Mar '16

Those Believing The U.S. Will Not Enter A Recession In The Next 3 Years Edged Up Only Slightly, To 20% From 16% Last Quarter www.corbinperception.com

84%

Sep '15

Yes

Leverage Levels In Focus; Financial Flexibility Critical To Investment Decisions At This Point

KEY GLOBAL FACTORS: VIEWS OVER THE NEXT 6 MONTHS Predicted To Improve

Predicted To Worsen 37%

Oil Prices

48% 28%

Inside The Buy Side速

U.S. Resi Const.

U.S. Non-resi Const.

26% 33%

33% Current

Investors Remain Most Bullish On U.S., Underscored By Continued Strength In Construction (R (Resi And NonNon-resi) resi) And Consumer

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China Banking Sys. 47%

U.S. Consumer

Refugee Crisis

38%

62%

China GDP

52% NA 51% NA 50% 52% 48%

Global Capex

Current

Findings On Europe Reveal It Might Be Worse Than Investors Expect; 25% Voice Concern Over Brexit

FED IMPACT LIMPING ALONG Will The Fed Continue To Raise Interest Rates In 2016?

Where Do You Think Fed Funds Rate Will Be At YearYear-end 2016?

Inside The Buy Side速

76%

Current Rate: 0.5%

24%

Yes

0.5%

0.75%

1.0%

1.5%

2.0%

Another Stabilizing Factor: Rate Hike Expectations Are Now Assumed

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PRESIDENTIAL RACE IS THE NEW X FACTOR What Impact Is Uncertainty Regarding U.S. Presidential Race Having On Markets?

Is The U.S. Presidential Campaign Impacting Your Asset Allocation?

52%

74% 38%

Inside The Buy Side®

26% 5%

Very Negative Neutral Negative

Positive

0% Very Positive

Yes

Which Candidate Would Have The The Most Negative Impact On On Markets? Bernie Sanders

85%

Donald Trump

76%

Ted Cruz

42%

Hillary Clinton John Kasich www.corbinperception.com

37%

Kasich Only Candidate Viewed As “Very Positive” For Markets

20% Follow us @CorbinResearch

EARNINGS BEST PRACTICE

Inside The Buy Side®

Scuttlebutt: Recently, there has been a lot of debate about the length of management’s prepared remarks on earnings calls. Members of the financial community, most often sell side analysts, have recently made the bold suggestion to shorten prepared remarks to less than 10 minutes or eliminate altogether. The main rationale behind this suggestion is that most analysts don’t have time and many calls simply regurgitate the press release (worst practice) versus framing the quarter in the context of business drivers and execution against long-term strategy and near-term initiatives (best practice). Rebuttal: Taking a different tact, we advise our clients – executives and IR professionals – to develop rich content that educates the financial community on quarterly performance and, more importantly, underscores strategy and positioning. While the only people asking questions on the call are typically sell side analysts, the call (and subsequent transcript) reaches a broad audience, including shareholders, bondholders, prospective investors and employees, all of whom possess various levels of knowledge about the company and its story. BottomBottom-line: The discussion should not be about whether to prepare remarks or the time one should spend on the script. Rather, it should be about recognizing how impactful the earnings call is and leveraging this channel to fully engage and robustly communicate with the financial community. By and large, prepared remarks can be tackled within 20 to 30 minutes, especially when utilizing an earnings deck (best practice). This approach assists in communicating the information so more time can be dedicated to the insights, leaving ample time for Q&A. For additional insights on earnings best practices, visit http://corbinperception.com/research http://corbinperception.com/research://corbinperception.com/research-portal www.corbinperception.com

Inside The Buy Side速

ABOUT US

We are Corbin Perception, a leading investor research and investor relations advisory firm that specializes in shareholder value creation. We leverage our broad company and industry experience, knowledge of best practices and benchmarking capabilities to provide research-driven counsel that enables our clients, publicly-traded companies across diverse industries, to positively differentiate their company in the market. We bring a unique perspective to our engagements, one that is based on a proven methodology and customized approach. Our industry-leading research, Inside The Buy-side速, is covered globally and regularly featured on CNBC. To learn more, visit our website at CorbinPerception.com www.corbinperception.com