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We have maintained our Neutral recommendation on chemicals maker Eastman Chemical (EMN - Analyst Report). While the company should benefit from Solutia acquisition and capacity additions this year, a weak European market remains as overhang.
    
Why Maintained?

Eastman Chemical’s first-quarter 2013 results, reported on Apr 25, were a mixed bag with adjusted earnings topping the Zacks Consensus Estimate while sales missing the same. Revenues rose at a healthy double-digit clip, driven by the contributions of Solutia acquisition. The company reaffirmed 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. Factoring in the synergies of Solutia acquisition, the company expects a 17%-19% annualized rise in earnings in 2013.

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.

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 across specific markets.

Eastman Chemical currently holds a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other companies in the chemical industry that are worth considering include Shin-Etsu Chemical Co., Ltd. (SHECY), Celanese Corporation (CE - Analyst Report) and FMC Corp. (FMC - Analyst Report). While Shin-Etsu Chemical retains a Zacks Rank #1 (Strong Buy), both Celanese and FMC hold a Zacks Rank #2 (Buy).

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