Wednesday, August 03, 2011

The Most Important Call of the Year: “I’ve Got All The Clarity I Need”

 We have, in the past, highlighted in these virtual pages the comments of David Farr, the outspoken and common-sense-laden CEO of Emerson Electric Co.
 Readers not familiar with Emerson should become familiar with it, for in its long history (it was founded in 1890) Emerson has outperformed its more famous relative, General Electric (founded two years later), by a wide margin…and never needing taxpayer dollars to bail itself out from bad decisions like Jack Welch’s bad decision to turn GE from a company that made stuff for Main Street to a company that ‘made the numbers’ for Wall Street, using GE Finance as a perpetual motion machine that lasted only as long as the credit cycle lasted.
 We once talked to an ex-executive at Emerson about the GE comparison.  He said to us: “You know we used to have a finance operation like GE, right?”  We said, “No, what happened to it?” He said, “We shut it down.”  We asked “Why?”  He said, “Because our CEO decided it was too risky.”  That’s the kind of CEO the ‘beat-the-numbers’ folks at GE could have used.
 In any event, Farr runs one of the most value-added earnings calls of the season, offering frank and unvarnished observations about not only Emerson’s far-flung operations, but also about the operating environment in which the company lives.
 And that environment is not getting any prettier, if yesterday’s call is any indication.  Indeed, we think yesterday’s call was the single most important this season, and perhaps this year-to-date.
 Now, for a full flavor of Farr’s comments, readers ought to get a hold of the full earnings transcript—or, better yet, listen to a replay of the call itself.
 But the heart of the call came two-thirds of the way through the Q&A, when he was asked by one of Wall Street’s Finest what triggered Emerson’s recent warning that growth was slowing, and whether it stemmed from the need for greater clarity out of Washington.
 Here’s what Farr said:

 “I just look at the order pace. I think the biggest issue that I'm watching right now is they're not really -- either in the US or Europe really addressing the gut issues. The US have enormous regulations coming at us right now.
 “There's -- the incentive to invest in the United States is negative and from my perspective.
 “People talk about ‘we want clarity’. I've got all the clarity I need. They're spending, they're regulating us, the tax rates, they're talking about raising the tax rate.
 “Our tax rate this year will be around -- in the US will be around 36%. We'll pay in US taxes this year over $500 million, actually pay the US government over $500 million, and they say they want to raise it even more. And so I'm looking at that as a -- I run a Company, I have a lot of money to invest and I look at that and I say I'm not going to invest it here and I think customers -- I think a lot of customers have the same concern.
 “And then when you have a company like Boeing, you're talking about one of the iconic US companies gets sued by the federal government. If that doesn't get your attention, nothing will. They get sued for investing $2 billion in South Carolina. Last time I saw South Carolina was a part of the United States of America and you get sued for that. I tell what you, the CEO, you get my attention.”

Let’s hope Farr’s comment get some attention where it matters.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at

© 2011 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.


babar ganesh said...

> The US have enormous regulations coming at us right now.

such as?

Jeff Matthews said...

Healthcare, to name a big one.


john said...

Jeff, can you speak to his claimed 36% tax rate. If he's really paying that, shouldn't they get a new accounting firm?

Jeff Matthews said...

John makes an excellent point.

GE had a 7% effective tax rate last year, by way of comparison. But in addition to the vaunted GE tax mitigators, much of that low-low rate is likely due to GE nearly hitting the wall during the crisis and requiring TARP money, plus GE's habit of buying companies high and selling them low.

I can't speak for why Emerson hasn't been more aggressive in cutting their tax rate. Some of its peers have shopped other countries (think Tyco) to do it.

I suspect part of it has to do with Emerson's conservative corporate culture, which has served the company and its shareholders very well since 1890--much better than the culture at GE has treated its shareholders, for example.

Any informed observations from Emerson followers are welcome.


Anonymous said...

I think Dave is referring to the statutory rate, not what EMR actually pays (29.4% actual ytd). We had Kellogg in this morning, and they mentioned that they have opened two plants this year, one in Mexico and one in Canada, specifically because the US statutory tax rate is 10-20% higher than all other developed countries. HON yesterday, at the same conference EMR is at, pointed out the 2000 jobs it has removed from the US since 2003 compared with the 28k it has created internationally. They stated that a big part of the reason for the job shift are punitive US tax rates and regulations (relative growth is the other key driver).

Anonymous said...

He sounds like a solid, level-headed CEO that knows what he's doing. I also keep in mind that he's talking his book just like everyone else.

Has there ever been a CEO who didn't want lower taxes,less regulation and a free hand to dispense with labor hiccups as they see fit?

I'd be very interested in seeing what Emerson's effective tax rate is along with some discussion of the merits of what particular regulation he's objecting to. A nebulous complaint of enormous regulations coming simply contains too little information.

Along with some drill-down into whether the legal action against Boeing has basis.

Jeff Matthews said...

Our first 'Anonymous' answers the second 'Anonymous' as far as effective tax rates go.

As far as the "nebulous" complaints about more regulation posited by Anonymous #2, there was nothing nebulous about them--only that we didn't reprint them hear.

They start with the healthcare fiasco and get more specific from there. Listen to the call or read the transcript for details before dismissing them as "nebulous."

And then ask yourself why only 2mm of the 7mm lost jobs have come back to the US. The answer is, "they have gone overseas."


Anonymous said...

Anon #2 chiming in one last time.

Jobs going overseas is an important problem but it's also a trend that has been going on for many years over periods of growth and recession.

I found the call transcript and want to focus on the core issue identified in the call. Weak orders and the macro condition of <1% GDP growth with an outlook that says more of the same coming down the road.

Surrounding that is a laundry list of things he doesn't like. Current tax rates, healtcare, dodd-frank conflict mineral regulation, boeing being sued, etc.

There's a lot of room to agree with him on many of the individual points but what's still missing is a convincing linkage between the things he doesn't like and the lack of demand in the broader economy.

I would go so far as to say that if he got his wish list--repeal the health care legislation, dump conflict mineral audits, no increase on topline corporate tax rates (probably going to be the case anyway) and the evisceration of unions (also the dominant trend boeing suit not withstanding)--that he would still find himself facing weak orders and stall-speed GDP growth because those aren't root causes or prescriptions for falling aggregate demand.

Frozen in the North said...

As a Canadian I am glad to see that jobs are being created here. As for the U.S. healthcare law, America speak to your Congressperson! Had the Repulbican engaged in serious discussion (as opposed to blocking at all cost) it is possible that a better law could have been produced. BTW environmental and other regulations are more severe in Canada, Canada has a state sponsored health care system (you know Socialism at work!).

As for the rest, my guess is that American companies are putting their employees where the growth is going to occur, and America is just not that place. Sorry folks

Jeff Matthews said...

That's a premise that can't be disproven, so anyone can believe whatever they like.

Still, it's worth listening to a CEO of a large, legitimate, long-term oriented, full taxpaying US corporation who says 'there's no incentive to invest here.'

More people in the White House should try it.


Matthew said...

Except that there is no serious proposal to raise the corporate tax rate. Both Democrats and Republicans propose to lower the rates and reduce deductions. Presumably (based upon their claimed rate) Emerson would be one of the winners in the process.

Clear, but wrong, I would say.

Anonymous said...

Capital likes to go where it's treated well. And tax policy is only part of the picture.

First of all, where's the growth? Well, it's not in the U.S., it's in the BRICs and aspiring BRICs. One thing our stimulus has done very well is actually stimulate foreign economies. That's fiscal and monetary policy which can handily trump tax policy (which is evaded anyway).

No executive will say to his boss or shareholders, let's invest in Detroit, or for that matter, California, because that's where the current and future growth is. I think even the Wall Street's finest would even throw up on such a conference call.

Secondly are tax, healthcare, environmental, labor and other regulations. We Americans like to live well and consume which means nice entitlements, clean air and water, and labor protections. Well, these are luxuries and they cost. Ever been to a BRIC country? It's unbelievably polluted; labor is nearly indentured servitude in certain industries; there's no safety net. I'm not saying it's good; I'm saying it's a fact.

Going back to CAPEX decisions, you compare plant costs and risks in various countries, well, you get the drift.

And where's our growth in the U.S.? Gee it's in healthcare and social media. Think how sustainable our growth will be based on these twin pillars of industrialization.