We are retaining our Outperform recommendation on Eastman Chemical Company’s ( EMN - Analyst Report ) following our assessment of its first-quarter 2012 results. Adjusted earnings of $1.22 a share outstripped the Zacks Consensus Estimate of $1.14.

Revenues rose 4% year over year to $1,821 million, yet missed the Zacks Consensus Estimate. The growth was backed by higher selling prices and double-digit revenue expansion at the Tennessee-based company’s Fibers segment.

Eastman Chemical expects volatility in raw material and energy costs to subside moving ahead. The company also expects capacity expansion and its impending acquisition of Solutia Inc. to benefit earnings in 2012.

Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses, is driving earnings. The company also benefits from business restructuring, recent acquisitions (including Brazilian plasticizers maker Scandiflex) and cost-cutting measures. It has sold unprofitable units and closed down the poorly performing ones.

We believe Eastman Chemical is well placed to benefit, in second-half 2012, from the synergies of the Solutia acquisition. The acquisition (expected to close in mid-2012) is a major step in the company’s strategy to boost its foothold in the emerging markets.

In particular, the Solutia deal should significantly accelerate Eastman Chemical’s growth efforts and offer lucrative opportunities in Asia Pacific. The company expects compound annual growth rate in Asia Pacific to approach 10% over the next several years.

Increased capacity additions should also support Eastman Chemical’s results in 2012. The company recently announced the startup of its non-phthalate plasticizer manufacturing facility in Texas City. The facility, which Eastman Chemical bought in mid-2011, will produce “Eastman 168” non-phthalate plasticizer, increasing its capacity by roughly 60%. With the capacity expansion, the company will be able to serve the growing needs of non-phthalate plasticizers worldwide.

Eastman Chemical competes with The Dow Chemical Company ( DOW - Analyst Report ) , EI DuPont de Nemours and Company ( DD - Analyst Report ) and Celanese Corporation ( CE - Analyst Report ) . Our recommendation on the stock is backed by a short-term Zacks #2 Rank (Buy).