Eastman Chemical Co. (EMN) is a chemicals company that produces materials, chemicals, and fibers in five segments: Additives and Functional Products manufacture chemicals for products in the coatings and tire industries; Adhesives and Plasticizers manufactures resins and plasticizers; Advanced Materials produces and markets copolyesters, cellulose esters, interlayers, and aftermarket window film products; Fibers manufactures and sells acetate tow and triacetin plasticizers, solution-dyed acetate yarns, cellulose acetate flake and acetyl raw materials; and Specialty Fluids and Intermediates provides products that include intermediates based on oxo and acetyl chemistries and performance chemicals.
Access to Growing Markets
The company's business segments currently sell differentiated products into diverse markets and geographic regions. Focus on fast-growing markets in Asia, particularly in China, with a joint venture for a 30,000-ton acetate tow manufacturing facility, which is now in operation. The joint venture was formed with Sinopec Yangzi Petrochemical Company Limited to build a hydrogenated hydrocarbon resin plant. Furthermore, management seeks to increase revenues from the development of new products, improving existing ones in key markets.
Restructuring the Business
The company sold some unprofitable units. For example, the company closed its polyethylene terephthalate (PET) polymer operations in Cosoleacaque, Mexico and Argentina. On the other hand, Eastman has 16 manufacturing sites in the U.S., Europe and Asia-Pacific, supplying products throughout the world. International operations accounted for about 53% of sales in 2013. To increase presence in the emerging markets, specifically in Asia Pacific, Eastman acquired St. Louis-based Solutia, a global leader in performance materials and specialty chemicals. The acquisition of Solutia is a significant step in the growth strategy and will strengthen Eastman as a top-tier specialty chemical company with strong stable margins. Cost synergies from the acquisition accounted over $100 million and it expects additional synergies of $20 million in 2014. Finally, it recently announced that it has entered into a definitive agreement to acquire Commonwealth Laminating & Coating. The acquisition will include Commonwealth's manufacturing facility and master distribution center in Martinsville, VA, and nine sales distribution centers that serve the global market. With the deal it expects to continue growing in its performance films products.
Investors looking at companies with large R&D expenditures should think about whether a single company's R&D spending is an expense or whether it is an investment. Eastman invests in energy efficiency through high performance materials, advanced cellulosics, and environmentally-friendly chemistry which we think are main drivers for the firm.
The firm is currently Zacks Rank # 4 – Sell, and it also has a longer-term recommendation of “Neutral”. A Sell rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 4.8%, which we think is not attractive.
Relative Valuation, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 12x, trading at a discount compared to the industry mean. Due to its revenue growth, Earnings per share (EPS) have increased in a tremendous way by 734%in the most recent quarter compared to the same quarter a year ago. In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, EPS and price performance showed an interesting upward trend in the last five years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.
Let´s compare the current ratio with the peer group in the next table:
Kronos Worldwide Inc
Eastman has a current ratio of 30.69% which is consider very attractive for investors and is higher than the ones registered by all other comps, including Methanex Corp (MEOH) and Airgas Inc (ARG), despite exhibiting very good ratios.
As outlined in this article, we think Eastman has increased its presence in higher-margin, faster-growing markets and regions and reduced unprofitable business. Also expansion through acquisitions will boost revenues and makes me feel bullish on this stock
Despite the recommendation by Zacks, I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Murray Stahl (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Arnold Van Den Berg (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jim Chanos (Trades, Portfolio) and Frank Sands (Trades, Portfolio) have taken long positions on it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
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