Thomas S. Gross, Vice Chairman and Chief Operating Officer, Electrical Sector, for Eaton Corporation (ETN), talked to the Wall Street Transcript about his company Eaton Corporation  Click here to read the complete interview.

TWST: Give us an overview of Eaton and a brief explanation of what you do. 

Mr. Gross: Eaton today is best characterized as a broad power management company. We make products and provide services that help our customers manage three basic types of power – electrical certainly is one; hydraulic or fluid power, which is used in a number of areas, is the second; and the third is mechanical power that you typically find in vehicles like trucks, and commercial vehicles and automobiles. So our business is electrical, hydraulic and mechanical power systems. These are all in the spotlight today and given how important energy conservation always has been and continues to be, I think what we do matters a lot. The company is rapidly approaching its 100th anniversary. We were founded in 1911, primarily interested at that time in vehicles, and there has been a terrific transformation of Eaton from a vehicle component company to now a much broader power management company.

Microsoft MSFT (NASDAQ) and particularly Steve Ballmer, the firm’s CEO, continues to find itself on the hot seat. More and more analysts and tech pundits are beginning to question the firm’s direction and leadership.  Yesterday, Kara Swisher of the Wall Street Journal’s All Things Digital examined some of the problems facing Microsoft and it’s chief executive in her piece entitled, What to make of the Microsoft-Is-Falling-And-Can’t-Get-Up Meme. Swisher is by no means in the camp seriously worried about the firm’s immediate future but she suggests there is a real need for some change at the firm.  According to Swisher,

Microsoft, as all tech companies do, needs to change, and a lot faster than it has so far; the company has been trying mightily to do so in search and recently, in mobile, where it is woefully far behind; its leadership under Ballmer, who took over from co-founder Bill Gates, has been meh enough to keep its stock moribund.

But, by no means recently–even if there is a better CEO for Microsoft out there than Ballmer–have I found the company execs ignorant about the tougher issues or unwilling to consider changes needed.

In fact, in its high-flying days, Microsoft did have a tin ear to criticism. No longer, and I would call its execs appropriately concerned about fixing its issues, although their efforts do suffer from the company’s massive size and inertia in making the right moves.

Thus, they certainly might not be successful at innovating, although these are the very kinds of problems Apple CEO Steve Jobs solved when he returned to a rotten company in what, in its current glory days, seems eons ago.

And Microsoft has been getting the same questions that are beginning to be asked about Google.

… That’s why–at this point–I can see no need for panic to set in about Microsoft…

… As for today, even though we are all terminal, the sky looks like it will remain intact at Microsoft for a little bit longer.

Swisher is rather pragmatic about Microsoft’s situation but pragmatism does not always reign particularly when you are talking about one of the largest and formerly most successful tech firms in history.  Keep a close eye on Ballmer and Microsoft.

The European debt crisis and shaky economy are not only affecting foreign exchange rates and raising borrowing costs, but they are also taking a toll on farm products companies, such as Chiquita Brands International (CQB).

“They have 40% of their business out of Europe, so clearly what’s going on in Europe is having a somewhat dramatic impact on expectations for the company in two ways,” said Scott A. Mushkin, a managing director and senior research analyst at Jefferies & Company. “One is currency, and the second is that they sell premium bananas. And as the European economy starts to slow significantly, that would hurt them on sales as well.”

Although Mushkin is optimistic the company will be better positioned following a European recovery — thanks to Chiquita’s proactive stance to try to keep its European bananas profitable — he is wary of the immediate impact the European crisis will have on the company.

“Bananas are priced in dollars, and so supply will adjust because of what’s going on with the euro. So that’s one issue, the euro. But the other issue is what’s going on with the economy over there, and that clearly is going to hurt demand for Chiquita’s bananas because of premium pricing,” Mushkin said. “Clearly what’s going on in the economies over there is going to impact particularly Chiquita because of the 20% premium we estimate they get on their bananas because of the brand. So if the economies roll over in Europe, or if they never get off of the mat, if you think they are going to do poorly, that would be a problem.”

Despite the strong correlation between veterinary spending and discretionary spending, which has faced intense pressure throughout the past two years, vet spending growth once again beat the U.S. GDP in 2008 and 2009, at the height of the recession.

“I believe the main reason for this is the fact that the highest utilizers of animal health care products and services, or pet owners who have prioritized health care for their pets, continued to provide a base of demand and essentially supported growth in the low single digits,” said Dawn R. Brock, a senior analyst at Kaufman Bros., L.P., where she covers animal health care players IDEXX (IDXX) and VCA Antech (WOOF). “In my mind, the key is that organic volume appears to be stabilizing. Neither [IDXX nor WOOF] experienced pressure, so to speak, on the pricing front over the last couple of years, and I think the reason for that is just the fact that the price points are generally quite low and a 2% to 5% increase is optically negligible to the consumer.”

Brock likens the animal health care industry to the recession-resistant human health care sector, emphasizing the former’s core pet owner universe, which prioritizes animal care and provides an embedded base of demand for companies such as IDEXX and VCA Antech.

“Generally, IDXX and WOOF are focused in the subsectors that generate mid- to high-single-digit fundamental industry growth, and collectively they add to this growth by not only taking existing share, but acting as the primary consolidators in the space,” Brock said. “Add to this the fact that you get the benefits of human health care without the drawbacks – limited reimbursement, regulatory and headline risk wrapped in cash-up-front model – and this is why the stocks have typically warranted a premium to their earnings growth rates.”

As their production volumes and stock prices show signs of a cyclical uptick, specialty chemical companies find competitive advantages by aiming for growth in emerging markets.

“I think any company that is exposed to growth in the developing countries and has invested in the infrastructure to access that growth has opportunities before it,” said Steven Schwartz, a research analyst for First Analysis Securities Corp. “It is not only because the developing countries, particularly the Asian countries, held up relatively better through this global recession, but also because of the longer-term secular trend that is going on with these populations raising their standard of living.”

Mr. Schwartz names Albemarle (ALB), PolyOne (POL) and Valspar (VAL) among the companies currently supplying products, such as plastic housings and wires for cars, and flame-retardant materials, to developing markets with increasing standards of living.

The analyst also points to Calgon Carbon (CCC), which boosted capital spending by 50% from 2008 to 2009 and is expected to continue to see increased cap ex, as an exemplary benefactor of these developing international opportunities.

“Calgon, which is one of several global producers, is in a strong position to supply a market where demand is forecasted to grow as much as 10% annually, according to some third-party estimates,” Schwartz said, adding that Calgon is projected to increase cap ex in 2010 by 35%. “The spending is primarily to expand their capacity, which makes their strategy sound almost like a startup company that invests all of its free capital back into the business to support growth.”

The gap in succession planning at corporations continues to raise serious problems for companies.  The Stanford Graduate School of Business’ June issue examined research on CEO succession planning conducted by Heidrick & Struggles, the executive search firm, and Stanford’s Rock Center for Corporate Governance.  According to David Larker a professor at Stanford’s Graduate School of Business,

“We found that this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario.”

To get a summary of the research’s findings go to Stanford’s GSB News.

As the usual set of large, discount retailers roll out more diverse pet supply offerings, specialty retailers, like PetSmart (PETM), are sharpening their competitive edge with more targeted merchandising initiatives and exclusive, brand-name products.

“The recession has had a definitive impact on spending on hard goods and as such, a lot of the retailers – again, I’ll use PetSmart as an example – are very much focused on merchandising in that category,” said Joan L. Storms, a vice president and research analyst at Wedbush Securities, Inc. In addition to reorganizing its in-store hard goods linear footage, PetSmart has also sealed strategic partnership agreements with two popular brands to sell exclusive products in PetSmart stores.

“For example, they are rolling out Martha Stewart (MSO) pet products by the end of Q2, and they also just announced an exclusive agreement with GNC to make animal vitamins and supplements,” said Storms. “[PetSmart] introduced for the first time nationally branded flea and tick products and advertised it heavily on national television, i.e., Frontline and Advantix.”

Storms attributes PetSmart‘s positive hard goods comps, which are up for the first time in four years, to the introduction of these branded flea and tick products in the most recent quarter.

“People are still buying high-nutrition-content food, so it seems like it’s more of consumers cutting back on hard goods,” she said.

The oil and gas industries aren’t the only ones facing uncertainty in the aftermath of the Deepwater Horizon explosion and ensuing environmental crisis in the Gulf of Mexico; specialty chemical companies Nalco (NLC), TETRA Technologies (TTI) and Newpark Resources (NR) are also feeling the sting, as many of their principal customers are oil and gas companies.

“It’s a situation that still has a significant amount of uncertainty in terms of the economic impact, and the market seems to be baking in almost a worst-case scenario,” said Michael J. Harrison, CFA, a research analyst at First Analysis Securities Corp. “I look at a company like TETRA Technologies, which provides completion fluids and other services to the oil and gas industry, and I see the stock down close to 40% from its 52-week high, even though they’ve quantified their exposure as less than 10% of sales.”

Harrison is particularly concerned for Nalco, who counts BP (BP) as one of its principal customers, along with other energy firms currently operating in the Gulf of Mexico.

“I have a broader concern about how the oil spill and deepwater drilling moratorium affects their customers in the Gulf of Mexico,” he said, adding that Nalco was recently in the news for its supply of a potentially environmentally hazardous water dispersant chemical to break up BP’s oil spill.

“If those [drilling] operations are curtailed over time, if there is increased regulatory pressure and it makes it more difficult to conduct drilling activity and exploration in the Gulf – and particularly in deepwater, which we had thought would be a source of strengthening demand for chemicals and services into the oil and gas industry – it looks like this opportunity could be pushed out.”

While reform continues to riddle the health care sector with uncertainty regarding the fiscal stability of Medicare and Medicaid, and the possibility of subsequent reimbursement rate reductions, the veterinary care space offers an attractive refuge to those investors seeking to benefit from the demographic trends and non-cyclical demand characteristics of human health care without the overriding risk.

“Certainly over the long term we are quite bullish on this space. We think it’s a very attractive investment alternative to the human health care companies, as veterinary medicine is not subject to many of the key issues or risks facing the human market,” said Ryan S. Daniels, a principal of William Blair & Company, LLC. “What I mean by that is veterinary health care is a cash-based business, so animal hospitals, like VCA Antech (WOOF), or laboratory diagnostic providers, like IDEXX Laboratories (IDXX), or distributors, like MWI Veterinary Supply (MWIV), don’t really have bad debt exposure. Compare that to a typical acute care hospital, with high-single- to low-double-digit bad debt.”

In addition, Daniels points out that vet care is immune to the third-party payer risk currently threatening human health care, and it is not subject to annual contract negotiations with managed care, malpractice risk or pending Medicaid uncertainty.

“We like the cash-based characteristics, people’s willingness to spend on their pets, that human-animal bond. It just has a lot of very attractive long-term features,” Daniels said. “We expect [veterinary care] to grow again this year. It was very modest growth last year, but long term I think it’s going to be similar to the past, which is roughly two times GDP growth in the U.S.”

We have resisted putting Steve Ballmer, Microsoft’s MSFT (NASDAQ) CEO, on the Liberum CEO Watch List for sometime now.  Ballmer’s ongoing startling statements about Microsoft and the industry along with his lack of innovation over the last number of years has begun to be examined by a number of specialists in the field.  Rumors even are heard about bringing Bill Gates back.  While it is hard to believe Ballmer is really at risk, maybe he should be.  Just today, Adam Lashinsky, the Senior Editor for Fortune wrote a piece in which he said,

He (Ballmer) is presiding over the umpteenth reorganization of the company he has run for years, having succeeded his pal, Bill Gates. His online business, whose Bing search engine is making modest gains against industry leader Google, lost more than $700 million last quarter.

Yet here was Ballmer traveling down a semantical rabbit hole over the future of the PCs. In Ballmerworld, it doesn’t matter that the PC is shrinking in relevance. Any device is a computer, and people will want to use Windows because they’re so familiar with it. By the way, Windows 7, Microsoft’s latest release, is crushing it, further proof that computer users love Microsoft.

CEOs certainly are paid to put on a happy face and represent as well as possible. But hearing Ballmer at the Wall Street Journal’s D conference left me with one question: What is the guy smoking? Windows 7 has been a “success” in part because Microsoft’s previous effort, Vista, was such a stinker. Businesses the world over held off so long on upgrading their PCs that once Microsoft got it right they had no choice but to start replacing obsolete equipment.Semantics aside, Ballmer knows as well as anyone that the future of personal-computer industry is in mobile devices. Here, Microsoft’s hand is so weak that its most important global equipment partner, Hewlett-Packard (HPQ), is buying a beleaguered smartphone maker, Palm (PALM), for its superior mobile operating system.

Ballmer really needs to show he understands his marketplace and his competition and how he expects to deal with it.  So far, in this regard he has been a dismal failure.  Under his tutelage the stock has not really shown much shine either.Stay tuned.