Corbin Advisors Releases Q1’23 Inside The Buy-Side® Industrial Sentiment Survey®

Corbin Advisors Releases
Q1’23 Inside The Buy-Side^®
Industrial Sentiment Survey^®

Investors Continue to Exhibit Mixed Sentiment and Characterize Management Tone as More Positive; Demand and Margins Take Center Stage Amid Broad-Based Expectations for Industrial Weakness in 2H23

• Greater than 50% expect Q1 Margins and EPS to Worsen, with skepticism increasing toward both KPIs QoQ, while views on Organic Growth are for sequential stabilization
• 41% anticipate Improving FCF, owing to improved inventory balances and executive focus on cash management
• Just 13% describe executive tone as Neutral to Bearish, a significant decrease from 41% QoQ; those perceiving executives as Neutral to Bullish or Bullish increased from 38% to 52%
• Conversely, investor sentiment is decidedly mixed with similar numbers characterizing their stance as Neutral to Bearish or Bearish (37%) or Neutral to Bullish or Bullish (35%)
• 87% are already seeing or are bracing for broad-based industrial weakness by year end
• Strong balance sheets remain in focus, with 69% favoring debt paydown as a primary use of cash, a survey record, while reinvestment, the leading second use of cash, sees the lowest level of support since the onset of COVID-19
• Only 21% encourage Increasing growth capex, down from 45% last quarter, with the majority, 68%, supporting Maintaining current levels, up from 11%
• Construction – both Residential and Non-Residential – are beleaguered by bears, with the latter seeing the most downbeat sentiment in survey history

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HARTFORD, CT – April 20, 2023 – 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 40 institutional investors and sell side analysts globally who actively cover the Industrial sector. Buy side firms manage more than $4.3 trillion in assets and have ~$332 billion invested in Industrials.

“We find ourselves again at an interesting juncture – with investor sentiment decidedly mixed and increasingly apprehensive against the backdrop of significantly more upbeat and optimistic executives – where perception is potentially tracking ahead of corporate reality by two quarters or so,” said Rebecca Corbin, Founder and CEO of Corbin Advisors. “While investors are aware of the uplift companies have gained from pricing actions and highlight strong backlogs, this is seemingly not enough to offset growing concerns of contracting industrial macro indicators and expectations for further slowing demand and order growth in the back half of 2023. Margins are center stage this earnings season, along with demand and price stickiness. Notably, free cash flow strength is the most compelling investment theme.”

Following last quarter’s survey, which found investor sentiment warming QoQ, views are mixed, with similar numbers characterizing their stance as Neutral to Bearish or Bearish (37%) or Neutral to Bullish or Bullish (35%). This contrasts with only 13% describing executive tone as Neutral to Bearish, a significant decrease from 41% QoQ, with no outright bears registered. Those perceiving executives as Neutral to Bullish or Bullish increased from 38% to 52%.

The growing divide in sentiment comes at a time when 2023 guides are described as In Line to Better Than expected and investors express greater confidence in sustained Organic Growth sequentially but exhibit growing concern about the back half of 2023. Indeed, with the Manufacturing PMI® registering a contraction in March for the fifth consecutive month, 87% of survey participants report already seeing or bracing for broad-based industrial weakness by year end.

More than half anticipate Worsening sequential Margins and EPS, with both KPIs seeing increased skepticism QoQ, while demand / order trends and margins are the most prolific topics of interest on earnings calls.

“Economic data continues to moderate and economists predict a modest contraction, yet industrials are predicting a 2H23 rebound. My sentiment and most investors are more bearish than that of the management’s color on how their businesses are doing. We look at the ISM® index where orders are way down and yet companies seem to say that for the next few quarters they are expecting to do decently; it just does not seem to fit. I know industrial companies overall have massive backlogs, so they are able to work those off and turn those backlogs into revenue. A lot of investor sentiment is going to be swayed by where order growth is going. From some of the headline indexes that you see, they are going to be heading south for the next few quarters, so it is difficult to bridge the investor’s slightly more bearish stance the next 6-9 months with management teams that seem to be more even keeled,” commented a Portfolio Manager whose firm manages ~$50 billion.

Reflecting growing investor angst, a recession is identified as the top concern, followed by inflation, geopolitics, and interest rates.

Another sign of cautiousness, preference for debt paydown set a new survey record, with nearly 70% in favor of buttressing balance sheets and maintaining 2.0x or less Net Debt-to-EBITDA levels. Furthermore, reinvestment, while still cited as the second preferred use of cash, slumps to its lowest level of support (42%) since the onset of COVID-19, down from 67% last quarter. Only 21% encourage Increasing growth capex, down from 45% last quarter, with the majority (68%) in favor of Maintaining levels, up from 11%.

Regarding industry sentiment, views on Commercial Aerospace, Agriculture, and Defense are the most upbeat, while Water sees the largest influx of bull support. Residential and Non-residential Construction are on the receiving end of the most downbeat views, with the latter representing the most bearish sentiment in survey history (76%). Notably, Chemicals see the largest uptick in negative sentiment QoQ.