Industrial Investor Sentiment a Mixed Bag but Less Downbeat QoQ; Expectations Are for Low-Single-Digit 2023 Organic Growth while Growth Investments Garner Increased Support

• 34% describe their sentiment as Neutral to Bearish or Bearish, an improvement from 53% last quarter, with an equal number reporting Neutral to Bullish or Bullish views, up slightly
• 41% describe executive tone as Neutral to Bearish or Bearish, an increase from 30% since last survey, but less downbeat than the COVID-19 onset (58%) and December 2015 (69%) periods, the latter representing the height of the 2014 – 2016 Industrial Recession
• Regarding Q4 earnings season, Organic Growth sees the most significant pullback in optimism QoQ with just 16% expecting top lines to Improve, down from 43%, and more, 52%, anticipating revenue to Worsen sequentially; Margins and EPS are also largely expected to Worsen
• 59% are bracing for broad-based industrial weakness in the first half of 2023, with continued outlooks for generally worsening key economic indicators over the next six months, albeit at less downbeat levels QoQ
• With 60% forecasting low-single-digit 2023 Industrial Organic Growth - 2.4% on average – most are also anticipating lower Organic Growth, Margin, and EPS guidance for 2023
• Amid anticipated strengthening Free Cash Flow, however, capital allocation is in focus; reinvestment remains the top preferred use with 45% supporting higher growth capex, up from 29% QoQ; paying down debt and conserving cash are second and third, respectively

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Corbin Advisors, a strategic consultancy accelerating value realization globally, today released its quarterly Industrial Sentiment Survey. The survey, part of Corbin Advisors’ Inside The Buy-side^® publication, is based on responses from 34 institutional investors and sell side analysts globally who actively cover the industrial sector. Buy side firms manage more than $1.7 trillion in assets and have ~$168 billion invested in industrials.

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Following last quarter’s survey, which found pronounced bearish sentiment, 34% of investors now describe their outlook as Neutral to Bearish or Bearish, down from 53%. The same number classify their views as Neutral to Bullish or Bullish, up slightly, while those in the Neutral camp more than double QoQ. Despite 41% categorizing executive tone as Neutral to Bearish or Bearish, up from 30% last quarter, less downbeat investor sentiment is identified in general across our survey.

As Q4’22 industrial earnings season begins, 43% expect Worsening sequential earnings, down from 56% last quarter, with only 20% now expecting consensus misses, an improvement from 35%. Views on Q4 organic growth see the most pronounced shift in sentiment with over half now expecting top lines to Worsen sequentially, up from 31% QoQ and just 16% anticipating them to Improve, down from 43%.

With projections for low-single-digit industrial organic growth in 2023, 2.4% on average (compared to expectations of 1.4% last quarter and 6.6% for all of 2022), 65% forecast 2023 revenues to be lower than 2022 and are baking in softness in YoY margin and EPS performance. Free cash flow is a standout, as nearly half belief levels will improve in Q4 and anticipate growth in 2023.

For Q4 earnings calls, investors are focused on inflation and pricing actions (49%), 2023 outlooks (38%), demand trends (38%), and capital allocation (21%), with labor shortages identified as a top concern by 33%, more than triple that of last quarter.

Tom Hayes, Managing Director at Northcoast Research commented, “My top three concerns are worker shortages, inflation, and China. I am interested in companies discussing if they can pass along price.”

As a result of weakening expectations, over 80% are seeing cost cutting by industrial companies in their universe, but amid expectations for a soft landing and a tight labor market, fewer than 20% report evidence of broad-based layoffs.

With more optimistic free cash flow expectations and less downbeat views QoQ, reinvestment remains the preferred top use of cash with 45% encouraging companies to increase capex, up from 29% QoQ. Bolstering balance sheets continues to be in focus with paying down debt and hoarding cash the second and third most preferred uses, respectively. Net Debt-to-EBITDA levels of 2.0x or less are preferred, further underscoring conservatism, and few now favor M&A.

“While our survey finds less pronounced bearish sentiment than last quarter, the overarching thematic is that industrial investors and analysts are bracing for weakness and generally sluggish organic growth in 2023 - to the tune of 2.4% on average,” said Rebecca Corbin, Founder and CEO of Corbin Advisors. “With expectations in line with broader market sentiment and executive tone, attention turns to navigating the panoply of ongoing challenges, including moderating but still persistently high inflation levels, slowing demand, broad-based cost cutting, labor shortages, and continued concerns with China, Russia, and Europe in general. Free cash flow is expected to strengthen as elevated inventories abate, another sign of moderating growth, but in a testament to lessons learned in the GFC and COVID-19 Pandemic, strategic reinvestment is widely supported. There is a lagging effect from recent actions – the biggest ones being rate hikes and corporate cost cuts – and as those still need to work their way through the system. The bar is set for conservative guides and with it, the opportunity to under promise and over deliver in 2023.”

With regard to industry sentiment, Defense, Commercial Aerospace, and Machinery see the most upbeat views while Residential Construction receives its most downbeat sentiment in survey history with zero bulls and Automotive garners the greatest influx of bears.

About Corbin Advisors

Corbin is a strategic consultancy accelerating value realization globally. We engage deeply with our clients to assess, architect, activate, and accelerate value realization, delivering research-based insights and execution excellence through a cultivated and caring team of experts with deep sector and situational experience, a best practice approach, and an outperformance mindset.

Since 2007, we have surveyed global investors quarterly on the equity markets, world economies, and business climate. Inside The Buy-side^®, our industry-leading research publication, is covered by news affiliates globally and regularly featured by leading financial media, such as CNBC and Bloomberg.

To learn more about us and our impact, as well as access our research, visit CorbinAdvisors.com.

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