Eastman Chemical Stays Outperform

We are reaffirming our Outperform recommendation on Eastman Chemical Company (EMN - Analyst Report). We believe that the company is well placed to benefit in the second half of 2012 from the synergies of Solutia acquisition.

Adjusted earnings of $1.40 a share for second-quarter 2012 topped the Zacks Consensus Estimate by 6 cents. Revenues, however, dipped 2% year over year to $1,853 million, and missed the Zacks Consensus Estimate of $1,948 million.

Eastman Chemical witnessed weakness across the board in the quarter with its Specialty Plastics division, in particular, was hit by weak demand. The company nevertheless continues to expect double-digit earnings growth 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 and cost-cutting measures.

Eastman Chemical, in July 2012, completed its acquisition of Solutia Inc., a global leader in performance materials and specialty chemicals, in a cash and stock deal worth roughly $4.8 billion (including assumption of Solutia’s debt). The acquisition represents a major step in the company’s strategy to boost its foothold in the emerging markets.

Especially, the Solutia acquisition 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.

It expects meaningful revenue synergies by leveraging technology and business capabilities and overlapping end-markets (especially automotive and architecture) of both companies.

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

Eastman Chemical 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 mid-2013.

Moreover, the company recently entered into a joint venture with Sinopec Yangzi Petrochemical Company Limited to build a hydrogenated hydrocarbon resin plant in Nanjing, China. The facility will expand Eastman Chemical’s total capacity for hydrogenated resins by 50%, making it the largest supplier of hydrogenated hydrocarbon resins globally.

Eastman Chemical, which competes with The Dow Chemical Company (DOW - Analyst Report), EI DuPont de Nemours and Company (DD - Analyst Report) and Celanese Corporation (CE - Analyst Report), currently retains a short-term Zacks #2 Rank (Buy).