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Industrial Sentiment Survey 4Q16 Earnings Primer
CORBINADVISORS.COM 1
Issue Date: January 19, 2017
Inside The Buy-side® Industrial Sentiment Survey 4Q16 Earnings Primer We survey institutional investors and sell-side analysts quarterly to
Market Performance1
gauge and track sentiment on topics pertaining to the earnings season, global economy and market drivers We share our research broadly with corporate executives, investor
relations (IR) professionals and investors Survey scope: 37 investors and analysts; buy-side firms manage
4Q16
One-Year
S&P 500
3.3%
11.2%
S&P Industrial
6.6%
16.1%
1
$272B in assets and have $23B invested in Industrials
As of Dec. 31, 2016
Survey timeframe: Nov. 30, 2016 to Jan. 16, 2017
Sector Focus
Role
8%
By Region 62%
N. America
32%
68% 92% Buy Side
Sell Side
Industrials
Generalist
Europe
16%
Asia Pacific
16%
Latin America
6%
CORBIN ADVISORS 2
Word Cloud: Frequency Of Occurrence
CORBIN ADVISORS 3
Key Findings: Turning A Corner Following Several Quarters Of Ho-Hum
Optimism Abounds As 2017 Gets Underway #1
While Investors And Analysts Primarily Expect In Line Earnings, Positive Green Shoots Emerge
While 63% expect in line results relative to consensus, only 8% expect Worse Than; survey findings register the highest level of positivity since report inception (Sep. 2015)
Management tone described as more positive, a significant uptick from last quarter
60% expect 2017 guidance to be somewhat higher than 2016
Only 30% assert the Industrial sector is in recession, down from 69% in Dec. 2015; as well, industrial orders are finally expected to accelerate
#2
Things Are Looking Up And Valuations Are Reflecting Optimism But Rain Could Be On The Horizon
77% expect the domestic economy to improve and 61% predict GDP expansion over the next 6 months
88% report Industrial valuations are fairly to overvalued
65% expect U.S. FX headwinds to worsen over the next 6 months; while currency and inflation are leading concerns
#3
Subsector Sentiment (Almost) Universally Improves; Those Left For Dead Stage A Comeback As Investors Plow Capital Into Cyclicals
Amid a momentous sentiment shift, Materials return to favor and rank in-line with Building Products as most bullish; 65% now expect Materials to grow faster than GDP, up from only 18% in September
Deceleration in Autos: 43% predict subsector will grow slower than GDP, up from 33% last quarter, while flow of capital into Water likely to slow amid largest net increase in negative sentiment CORBIN ADVISORS 4
Expectations
Earnings Largely Expected To Be In Line With Consensus; Most NonDownbeat Views Since 3Q15 Expectations Regarding 4Q Earnings Performance Relative To Consensus
58%
Mar '16
63%
50% 50% Jun '16 Sep '16 Dec '16
35% 34%
29% 15% 16%
21%
21% 8%
Better Than
In Line
Worse Than
92% predict 4Q earnings will be in line or better than consensus, while 50% expect a sequential improvement Furthermore, 60% anticipate 2017 annual guidance to be above outlooks provided last year In September 2015, expectations for worse than consensus results registered at 57% and have steadily
declined since Only 30% assert the Industrial sector is in a recession, down from 48% QoQ and 69% YoY CORBIN ADVISORS 5
Expectations
On Earnings Expectations Vs. Consensus Better Than
In Line
Worse Than
“Improving sentiment, higher oil and gas prices.” Sell Side, N.A.
“Worldwide slowdown. Infrastructure spending not likely until late 2018.” Sell Side, N.A.
“Lower volumes and pricing/ margins.” Buy Side, N.A.
“Better acceleration in animal spirits, spending post-election and seeing indicators tick up.” Sell Side, N.A.
“Ongoing cost cutting, better product mix and geographical diversification are positive catalysts, which are helping to reduce some of the seasonal slowdown.” Sell Side, Europe
“Industrials are not showing any inflection. Weather comp vs. 4Q15 will be difficult.” Sell Side, N.A. “Slowdown in capital investment and some cost pressure.” Sell Side, Europe
“Impact of demonetization.” Sell Side, Asia
“Consumer spending is cyclically high at end of year. This is supported by seasonally high sales during Christmas.” Sell Side, Asia
CORBIN ADVISORS 6
Expectations
Most KPIs Expected To Remain The Same Or Improve; Still, Some Trends Reverse And Margin Expansion Is A Question Mark Revenue
EPS 46% 40%
37% 30%
45% 41% 41% 37%
48%
39%
37%
35%
40%
40% 36%
31%
29%
19%
25% 22%
19% 15%
Improving
25%
23%
Staying the Same
Worsening
Improving
Cash Flow
Staying the Same
Worsening
Operating Margins 46%
58% 45% 37%38% 29%
46% 40%
37%
35%
36%
30% 36%
25% 25%23%
39% 38% 35% 31%
23%25%
19% 4%
Improving
Staying the Same
Improving
Worsening
Mar '16
Jun '16
Sep '16
Staying the Same
Worsening
Dec '16
CORBIN ADVISORS 7
Expectations
Strong Uptick In Order Rate Expectations Across The Board Short-cycle Products
14%
4%
3% 30%
19%
Long-cycle Products
7% 7%
37%
Services
3%
8%
10%
15%
15%
30% 30%
39%
55% 35%
72%
71% 26%
40%
67%
4% 29%
45%
34%
31%
14%
57% 63% 52% 46%
29%
35% 11%
Mar '16
Jun '16
Sep '16 Dec '16
35%
26%
18%
14%
13%
Mar '16
Jun '16
3% Sep '16 Dec '16
Strongly Decelerate
Decelerate Somewhat
Accelerate Somewhat
Strongly Accelerate
Mar '16
Jun '16
4% Sep '16 Dec '16
Remain the Same
CORBIN ADVISORS 8
Sentiment
Investor/Analyst Sentiment And Management Tone Further Underscores Improving Outlook Investor/Analyst Sentiment
Management Tone 4%
11% 38%
37% 60%
42% Bullish Neutral to Bullish 27%
Neutral Neutral to Bearish 30%
48% 20%
Bearish
35% 20%
17% Sep' 16
11%
Dec' 16
Sep' 16
Dec' 16
CORBIN ADVISORS 9
Sentiment
On Investor Sentiment Drivers Neutral to Bullish
Top Concerns (unaided)
“New Administration, higher oil prices.” Buy Side, N.A.
•
Valuation/Overheating Markets
“Gradual legislative approval for programs.” Buy Side,
•
GDP Growth
•
Inflation
•
Strong USD
•
Commodity Prices
•
Aggressive Rate Hikes
“Still seeing growth in the pipeline together with lower imports after protectionist measures.” Sell Side, Europe
•
Trade Policy
“Stable macro picture.” Sell Side, Asia
Trending Topics (unaided)
N.A.
“A lot of the 'Trump positives' and the rebound in Energy are baked in; strong USD could emerge as a headwind mid-year.” Sell Side, N.A. “Trump initiatives as a catalyst for change.” Sell Side, N.A.
•
Investment In Innovation/Technology (i.e., “digitalization”, “software”)
“Broad-based demand weakness.” Buy Side, N.A.
•
Cost-cutting Initiatives
“Valuations seem excessive.” Sell Side, N.A.
•
Tax Reform
“Economic cycle in Latin America.” Sell Side, LatAm
•
Operational Efficiency
•
Uncertainty
Neutral to Bearish
CORBIN ADVISORS 10
Sentiment
88% Continue To Classify Industrials As Fairly To Overvalued… How Would You Classify Industrial Valuations In General? 44%
41%
48%
47%
Sep '16 Dec '16
8%
12%
Under
Fairly
Over
Undervalued
Fairly Valued
Overvalued
“IPOs of state-owned consumer companies draw investors’ attention.” Sell Side, Asia
“We don't use traditional valuation metrics. By our measures, Industrials are attractive at these levels but we understand that the normal metrics show them more fairly valued.” Buy Side, N.A.
“Excessive valuations and weak demand outlook.” Buy Side, N.A.
“Upside in target price.” Sell Side, LatAm
“Historically high P/Es.” Buy Side, N.A.
“All the good from Trump optimism is priced in without regard for potential risks in implementation.” Sell Side, N.A.
CORBIN ADVISORS 11
Sentiment
…And Despite Valuation Concerns, Investors Bust Out Of Rut And Deploy Capital How Would You Describe Your Recent Activity In Industrials? 54%
54%
41%
Mar '16 29%
Jun '16* Sep '16
25% 26%
24% 15%
19%
Dec '16
18% 6%
Net Buyer
18%
19% 20%
18%
8%
Net Seller
Holding
Rotating
Net Buyer
Holding
Net Seller
“Clients like the infrastructure angle.” Sell Side, N.A.
“Rates and GDP.” Sell Side, N.A.
“Valuations imply meaningful acceleration in global GDP growth, which remains uncertain.” Buy Side, N.A.
“Not positioned either way.” “Group has been under owned for a long time; investors are rotating back in.” Sell Side, N.A.
Buy Side, Europe
*Jun ‘16 and Dec ‘16 values do not equal 100% due to 3% “Liquidating” not displayed on chart CORBIN ADVISORS 12
Going Forward
U.S. Sentiment Improves While Mexico Hits A Wall Over The Next Six Months, What Are Your Expectations For The Following Economies? U.S.
6%
17%
77%
+35 pts
-13 pts
India
9%
34%
57%
+3 pts
+1 pt
Brazil
11%
46%
43%
+18pts
-10 pts
Southeast Asia
14%
46%
40%
+7 pts
+10 pts
China
26%
34%
40%
+2 pts Eurozone
-9 pts 14%
54%
32%
+5 pts Japan
-9 pts 5%
69%
26%
+22 pts LatAm (ex-Brazil)
-28 pts 9%
68%
23%
-6 pts Mexico
8%
-16 pts 49%
43%
-17 pts
-35 pts Improving
Staying The Same
Worsening
CORBIN ADVISORS 13
Going Forward
FX Headwinds = Category 5 Storm? Oil Patch Hits A Gusher! Over The Next Six Months, What Are Your Expectations For The Following Economies? Oil & Gas Markets
77%
19%
+47 pts
-22 pts
Housing/Resi Const.
54%
35%
+15 pts 46%
42%
12%
+29 pts
-27 pts 27%
58%
15%
+19 pts FX Headwinds
4%
11%
-11 pts
Non-resi Const.
Global Capex Spending
4%
-20 pts 31%
65%
-28 pts
+38 pts Improving
Staying The Same
Worsening
61% expect U.S. GDP to improve, supporting the case for green-shoot optimism and hopeful end to the Industrial recession
Maintaining a pace of moderate expansion, 61% expect Global PMI to stay the same
68% expect company input costs to worsen, highlighting concerns around inflation CORBIN ADVISORS 14
Outlook
Sentiment Improves As Subsector Favorites Shift
Predicted To Grow Faster Than GDP 63% 65%
Building Products
Materials
Predicted To Grow Slower Than GDP
18%
42%
55% 50%
45% 48%
Sep' 16
50% 38% 55% 33% 35%
Materials
55%
Water
43%
Transportation (Trucking)
37%
Non-Resi Const.
33%
Machinery
55%
Resi Const.
58%
Automotive
65%
Defense
68%
Agriculture
Water
22% 5% 17%
Sep '16
Dec' 16
Materials Back From The Dead With Largest Increase In Bullish Sentiment; Building Products Maintains Perch As Top Subsector
Dec '16
Ag Remains Most Bearish; Auto In Need Of Roadside Assistance While Water Sees Biggest Increase In Bearish Sentiment
CORBIN ADVISORS 15
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CORBIN ADVISORS 16