Trump's Trade Tantrum Revives Corporate Headaches
(Bloomberg Opinion) -- Emerson Electric Co.’s struggles show why President Donald Trump’s latest tariff threat will hit U.S. manufacturers harder than his initial volleys.
The $40 billion industrial conglomerate trimmed its full-year guidance on Tuesday after posting weaker-than-expected fiscal second-quarter profit margins and sales growth. The earnings whiff comes just one day after U.S. Trade Representative Robert Lighthizer said Trump wasn’t bluffing when he threatened Sunday by tweet to increase tariffs on $200 billion of Chinese imports to 25 percent and roll out new levies on an additional $325 billion of goods.
The biggest source of disappointment for Emerson was its commercial division, which sells air conditioners, food-waste disposals and grocery-store refrigerators. Interestingly, the company said that business made progress in raising prices to offset the rise in costs that resulted in part from Trump’s initial round of tariffs imposed last year. But the commercial unit saw no sales growth, after adjusting for the impact of currency swings and M&A. Emerson blames that on weakness in non-China Asian markets and an inventory hangover in North America after a rush of buying ahead of tariffs and the associated price hikes.
The commercial unit’s profit margin of 21 percent was down about 250 basis points from the year-earlier period and fell short of analysts’ estimates. Emerson still thinks this business can achieve the low end of its 22 percent to 23 percent margin target for the year. That’s partly because it will cut back on investments and reduce costs, but also because the company is hoping to see easier comparisons on raw-material prices as it moves into the back half of its fiscal year. The Trump administration’s tariffs and China’s reciprocal actions began to take effect in July 2018. Trump’s reigniting of tensions means those costs may instead be ramping up further.
Emerson’s earnings press release doesn’t mention the possibility of an acceleration in tariffs and the company will likely be asked to delve deeper into this issue on a call with analysts later today. Perhaps CEO Dave Farr thinks the stepped-up tariffs are just a negotiating ploy. But RBC analyst Deane Dray estimates 10 percent of the company’s sales are tied to China, making it more exposed to the trade war than some of its industrial peers. The increase in tariffs to 25 percent had previously been scheduled to occur on Jan. 1 before Trump delayed the measures as a gesture of goodwill. But some companies had already conservatively baked the higher levies into their guidance. Emerson didn’t. Farr had previously estimated the impact of tariffs at about $125 million for this year, but that was based only on what was in place when Emerson reported fiscal fourth-quarter results in November.
Many industrial companies have been able to use price increases to at least neutralize the impact of tariffs, but as Parker-Hannifin Corp. CEO Thomas Williams said last week, the trade war hasn’t only led to higher costs, it also has had a dampening effect on demand. And weakening orders at both his company and at Emerson raise the question of whether the market will be able to absorb additional rounds of price increases or if the orderly sales slowdown we’ve been seeing, particularly in shorter-cycle industrial businesses that react more quickly to economic swings, will pivot more aggressively toward outright declines.
At Emerson, the company now expects organic sales growth of as much as 5.5 percent this year, down from a previous target of as much as 7 percent. In its commercial unit, it now forecasts just 2 percent sales growth, compared with a previous range of 3 percent to 5 percent. But it also cut its outlook for its factory-automation arm, reflecting weakening demand for automotive and electronics-linked equipment and a pause in spending among energy customers as they try to get a handle on volatile oil prices.
I’ve written numerous earnings stories this year that include some variation of the phrase,“The economy isn’t falling off a cliff, but …” Most of the focus has been on key trouble spots like China, the sputtering automotive market and weakness in U.S. residential construction. Even when signs have indicated the slowdown may be spreading, the perception was that it would be gradual and arguably healthy. That assumption may not hold if Trump decides to create a cliff and push manufacturers over it.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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