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Eastman Chemical Gains on Cost-Cut Actions Amid Soft Demand

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We issued an updated research report on Eastman Chemical Company (EMN - Free Report) on Sep 16.

Eastman Chemical, which is among the prominent players in the chemical space along with PPG Industries, Inc. (PPG - Free Report) , Air Products and Chemicals, Inc. (APD - Free Report) and Celanese Corporation (CE - Free Report) , benefits from its innovation-driven growth model, cost reduction actions and acquisitions amid certain headwinds including a difficult demand environment.

The company is focused on productivity and cost-cutting actions in the wake of a challenging environment. It is taking an aggressive approach to cost management in response to the coronavirus pandemic. It has significantly increased its cost-reduction target, which is forecast to be roughly $150 million of net savings in 2020. These cost actions include reduction of discretionary spending. The company’s cost reduction actions are expected to contribute to its earnings per share in 2020.

Moreover, Eastman Chemical is focused on growing new business revenues from innovation. In particular, the company’s Advanced Materials unit has a number of products that are driving new business revenues.

The company also remains committed to maintain a disciplined approach to capital allocation, with an emphasis on financing its dividend and debt reduction. It expects to reduce net debt by more than $600 million in 2020. Eastman Chemical is also taking actions to boost its cash flows. These include reduction of capital expenditure. It expects to generate more than $1 billion of free cash flow this year.

The company is also benefiting from synergies of acquisitions. The acquisition of Marlotherm heat transfer fluids manufacturing assets in Germany has allowed the company to boost its heat transfer fluids product offerings to customers globally. Moreover, the acquisition of Spain-based cellulosic yarn producer, INACSA reinforces the growth of the company’s textiles innovation products like Naia cellulosic yarn.

However, Eastman Chemical is exposed to weaker demand across certain markets due to coronavirus. The company saw lower demand in transportation, building & construction, consumer durables and textiles end markets in the second quarter, hurting its volumes in these markets.

Demand weakness across certain markets is expected to continue in the third quarter due to the impacts of the pandemic. As such, sales volumes are likely to remain under pressure in the third quarter and continue to hurt the company’s top line. Eastman Chemical did not provide earnings guidance for 2020 due to higher level of uncertainties related to the impacts of coronavirus.

The company also faces some headwinds from higher maintenance spending in the third quarter. Its Chemical Intermediates segment is expected to witness headwind from increased maintenance shutdowns in the quarter. This is likely to weigh on margins in this unit.

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