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Nov 08, 2021

Investors fret over industrials stocks as supply-chain and inflation issues bite

Survey of investors finds 58 percent think earnings in the sector will decline

Investors are worried about the outlook for industrials companies, with more than half expecting earnings to decrease amid ongoing supply-chain issues and high inflation, according to new research.

Corbin Advisors’ industrials buy-side perception study, which polled around 30 sector-focused investors and analysts, finds 58 percent believe earnings will decrease sequentially, a rise from 10 percent in last quarter’s survey.

Seven out of 10 respondents expect revenues to improve sequentially, although this is down from 100 percent last quarter, while 83 percent expect margins to worsen sequentially, up from 13 percent and the second-highest level on record.

The top concerns among respondents are supply-chain issues, mentioned by 86 percent of respondents, followed by inflation and the US administration, cited by 57 percent and 33 percent, respectively. Other key risks mentioned by investors include labor shortages, interest rates, slowing demand and the growing importance of ESG.

‘The supply chain is driving revenue weakness, costs are impacting margins and demand is slowing as economic data softens,’ says a buy-side industrials specialist who responded to the research.

‘The top question we have, other than the general business environment, is ESG,’ says a buy-side generalist. ‘We want to know [companies’] disclosure, the timeline, the key topics and where they are on the journey. I think [industrials companies] are getting more and more scrutiny on their ESG disclosure.’

Despite expectations of falling earnings, 68 percent of investors say there will continue to be strong demand levels in 2022, finds the research. More than half (57 percent) are seeking clarification on demand trends in the next earnings call, compared with 32 percent last quarter.

Investors also gave their preferences on the employment of cash by industrials companies. The most popular option is reinvestment, cited by 59 percent in their top two preferences, though that is down from 84 percent in last quarter’s survey. Meanwhile, the proportion of respondents putting M&A in their top two choices has risen from 38 percent to 53 percent quarter over quarter.

The research polled investors and analysts from buy-side firms with around $2.7 tn in assets under management, including $258 bn of investments in industrials companies. Of the respondents, 86 percent are based in North America and 14 percent in Latin America. The survey was conducted between September 14 and October 14.

During the third-quarter earnings season, industrials stocks have shed light on some of the supply-chain and inflationary issues threatening the global economic recovery. For example, last month diversified manufacturer 3M lowered its full-year earnings guidance ‘to reflect the current global supply-chain disruptions,’ according to the company.