On Feb 6, we reaffirmed our Neutral recommendation on chemicals maker Eastman Chemical (EMN). While the company should gain from Solutia acquisition, cost-cutting measures and capacity additions, we remain on the sidelines considering raw material cost pressures and a still weak European market.
Why Hold?
Eastman Chemical, a Zacks Rank #3 (Hold) stock, posted better-than-expected fourth-quarter 2013 results on Jan 30. Both revenues and adjusted earnings for the quarter beat Zacks Consensus Estimates. Strength across Additives and Functional Products, Advanced Materials and Fibers divisions boosted the bottom line in the quarter. The company expects to benefit from its strategic actions in 2014.
Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses remains its strength. It also benefits from business restructuring and cost-cutting measures.
The acquisition of Solutia represents a major step in Eastman Chemical’s strategy to boost its foothold in the emerging markets, especially in Asia Pacific. The company ended 2013 with over $100 million in cost synergies from the acquisition.
Eastman Chemical should also gain from increased capacity additions. The acetate tow manufacturing facility, the company’s joint venture investment in China, is now in operation and earnings benefit from the joint venture is expected to begin this year. Moreover, Eastman Chemical is seeing strong adoption of Tritan copolyester product line and it is increasing Tritan capacity at its Kingsport facility by around 25%. It is also expanding capacity for its Therminol heat transfer fluids.
Eastman Chemical also remains committed to boost shareholder returns, manifested by the recent 17% hike in its quarterly dividend to 35 cents per share from the prior payout of 30 cents.
However, uncertainty regarding the timing of a recovery in Europe remains a concern. Automobile as well as building and commercial construction markets still remain soft in Europe.
Moreover, Eastman Chemical remains exposed to volatility in raw material costs and pricing pressure. Higher energy and raw material costs, particularly for propane, are expected to weigh on the company’s earnings in 2014.
Weak demand for adhesives resins in specific markets and lower pricing due to competitive pressure is also affecting sales in the company’s Adhesives and Plasticizers segment.
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