Investors came away from Morgan Stanley’s recent Industrials
Conference with a more optimistic outlook than they expected,
based on perspectives including freight transportation’s momentum
and AI’s impact on the growth of data centers.
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the
Market. I'm Michelle Weaver, Morgan Stanley Research's U.S.
Thematic Strategist.
Ravi Shanker: I'm Ravi Shanker, Morgan
Stanley's Freight Transportation and Airlines Analyst.
Chris Snyder: And I'm Chris Snyder, the
U.S. Industrial Analyst.
Michelle Weaver: Today, we'll talk about
key themes for Morgan Stanley's recently concluded industrials
conference in Laguna Beach.
It's Thursday, September 19th at 10am in New York.
Last week, we were all out in Laguna Beach at the industrials
conference. There were about 500 different industrials investors,
along with 156 corporates, which gave us a pretty comprehensive
read on what's going on in the industrial sector.Investor
sentiment around industrials was pretty poor heading into the
conference, and the overall tone of management, though, seemed
better than feared in presentations.
Chris, your coverage includes companies with exposure to a wide
range of end markets. What did you learn about the cycle from
your discussions with company management?
Chris Snyder: Yeah, I think you categorized
it well: consistent, largely unchanged, but better than feared.
Morgan Stanley did a poll ahead of the conference. And only 5
percent of investors thought that the conference would be bullish
for industrial risk sentiment. Coming out of the conference, 60
percent of industrial investors are bullish on risk sentiment
into the end of the year. So, I think it kind of shows that
sentiment was in a very bad place and ‘better than feared’ is the
right way to categorize it.
We've generally been surprised at the lack of optimism around the
industrial cycle in the market. The industrial economy has been
in contraction for almost two years now, and it seems like we're
on the verge of a rate cut cycle, which has historically been a
tailwind for the cycle.
You know, in our coverage, business is driven by a combination of
investments and then production of goods; and the companies we’re
seeing real bifurcation on that. On the investment side -- and
that's things like data center, new manufacturing facilities with
all the US reshoring momentum -- that business remains strong.
And on the production side of the house, that business remains
soft. And that's generally in line with our call. We prefer CapEx
exposure, particularly those that are tied into energy
efficiency.
Michelle Weaver: Great. That's really
positive to hear that the investment side is still doing well.
Ravi, your freight coverage is very macro as well -- in that the
freight companies move all the stuff that other companies are
making. How does demand from shippers look? And what are freight
companies saying about the cycle?
Ravi Shanker: Yeah, from a freight
transportation perspective, I guess, no news was good news out in
Laguna; largely because we have already started to see an
improvement in the freight cycle, at the end of 1Q going into 2Q.
And I think the market was just waiting to see if that would
sustain through 3Q. The data has been supportive so far, and the
good news was most of the trucking companies did validate the
fact that we have seen a continuation of seasonality from 2Q into
3Q.
And looking forward, they're also anticipating a fairly decent
peak season, probably the most robust peak season we have had in
two or three years. And I use the word robust on a relative basis
because it's not going to be the greatest peak season ever. But
certainly, better than we've had the last couple of years. But
that momentum should continue into 2025.
So, nobody really was high fiving out there. But certainly, noted
the fact that we are seeing a continued improvement in the cycle;
and that momentum should continue into next year.
Michelle Weaver: One of Morgan Stanley
Research's three key themes for the year is technology, diffusion
and AI; and this theme came up repeatedly throughout the
conference.
Chris, some of your companies have significant exposure to data
centers, which have seen a huge boost in demand from AI. What
does the growth opportunity look like for Multi's names with
exposure to data centers?
Chris Snyder: Yeah, data center is
a growth opportunity for my industrials’ coverage. And they
primarily are driven by the investment side. How much data
centers are we building? And they sell a lot of the equipment
that goes into the data centers. And what we're seeing now is
that there's a huge focus on energy efficiency within the data
center. You know, obviously it helps improve their cost profile,
but also as there's growing concerns around load growth and
electricity allotment.
And what that's doing is it's driving demand towards the high end
of the spectrum, which is where our big public companies compete.
You know, they're the ones that are always spending R&D and
innovating and driving energy efficiency for the customer. So, we
think there's a mix up opportunity behind it.
In terms of growth rates, you know, most of the companies are
talking to about 15 percent kind of plus as the growth rate going
forward or where they are exposed. And the conference brought,
you know, really positive updates. There was no talk of slowdown.
And generally, it sounds like momentum remains firm and growth
will continue.
Michelle, what were some of the other ways companies discussed AI
or how they're leveraging the technology?
Michelle Weaver: Yeah. So, when I think
about how companies have been adopting AI so far, not just within
industrials, but within the broader market, it's largely been
about things that are plug and play solutions; something like
taking a chat bot, putting that on your website, and then you
don't need as many customer service representatives.
So, when I'm at these kind of events, I always like to listen for
more unique or differentiated ways of adopting AI. And I heard
about a really interesting case from a company that holds about
half of the global market for luxury seating. Processing leather
is a super important part of manufacturing seats and has
typically been really labor intensive and skilled labor at that.
But this company is using AI to scan cow hides to determine what
the optimal use for them is, and then inventory them.
Before that, a worker had to individually mark the leather for
imperfections and then determine how to cut around that. So, I
thought that was a pretty interesting use of AI.
But now I want to turn over to the consumer exposed pockets of
industrials. Discretionary spending has been slowing as multiple
years of high prices have been weighing on consumers. But
overall, I thought the commentary around the consumer at the
conference seemed pretty mixed, and we saw a big divide between
the high-end and low-end consumers.
Ravi, what did you hear from the airlines around travel demand?
Ravi Shanker: Unlike the transportation
side where what we heard was fairly consistent with expectations,
I think things were much better than expected on the airline side
largely because the airlines came out and validated the fact that
demand continues to remain very robust -- pretty much across the
board. But as you mentioned, definitely at the high end, the
premium traveler continues to travel.
International is rebounding post Olympics. Corporate is
normalizing as well, and some of the low-cost carriers did
mention that they were seeing some weakness on the low-end
consumer side. Although it was unclear to them if that was actual
demand weakness or a function of too much capacity in the
marketplace.
But they did come out and validate that demand continues to
remain very robust; and with capacity continuing to come out of
the marketplace and be more balanced with demand, you have seen
pricing inflect positive for all the airlines for the first time
in several quarters. So definitely, a pretty supportive backdrop
for airline demand. And that is going to show up in airline
numbers in the third and fourth quarters as well, we think.
Michelle Weaver: As someone who's been in
the airports a lot recently, I can definitely feel that demand
has held up well. Chris, some of your companies also sell
consumer products. What does consumer demand look like in your
space?
Chris Snyder: I would say stable, but at
soft levels. And I think a lot of the tailwinds that Ravi is
seeing on the service side of the house in airlines is actually
coming at the expense of my companies who sell consumer goods.
You know, if you look at the consumer wallet share, service mix
has not gotten back to the levels that we saw in 2019 and we
think that will remain a headwind for goods purchasing going
forward.
Michelle Weaver: Ravi, Chris, thank you for
taking the time to talk.
Ravi Shanker: Thanks so much for having me.
Chris Snyder: Thank you.
Michelle Weaver: And to our listeners,
thanks for tuning in. If you enjoy the show, please leave us a
review wherever you listen to podcasts and share Thoughts on the
Market with a friend or colleague today.
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