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We are retaining our Neutral recommendation on chemicals maker Eastman Chemical (EMN - Analyst Report). While it should benefit from Solutia acquisition, cost-cutting measures and capacity additions this year, lower pricing and a weak European market remains as headwinds.
Why Retained?

Eastman Chemical posted better-than-expected second-quarter 2013 results on Jul 29, with both revenues and adjusted earnings topping Zacks Consensus Estimates. Revenues soared year over year on contributions from the Solutia acquisition. The company raised its earnings guidance for the full year.

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 sees cost synergies of more than $100 million this year.

Eastman Chemical should also benefit from increased capacity additions. The company is also making progress in its growth initiatives through its joint venture in China for a 30,000-ton acetate tow manufacturing facility, which is expected to come online in third-quarter 2013. Earnings benefit from the joint venture is expected to begin in early 2014.

Moreover, Eastman Chemical is seeing strong adoption of Tritan copolyester product line and recently announced its plans to increase Tritan capacity at its Kingsport facility by about 27% to 76,000 metric tons from 60,000 metric tons. It is also expanding capacity for its Therminol heat transfer fluids.

However, uncertainty regarding the timing of a recovery in Europe remains a concern. Automobile as well as building and commercial construction markets remain soft in Europe.

Moreover, Eastman Chemical remains exposed to volatility in raw material costs and weak pricing. Weak demand for adhesives resins in specific markets is also affecting sales in its Adhesives and Plasticizers segment.

Other Stocks to Consider

Other companies in the chemical industry with favorable Zacks Rank are Northern Technologies International Corp. , Cytec Industries Inc. (CYT - Snapshot Report) and PPG Industries Inc. (PPG - Analyst Report). All of them carry a Zacks Rank #2 (Buy).

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