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Eastman Chemical Poised on Cost Cuts Amid Pricing Headwinds

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On Aug 29, we issued an updated research report on chemical maker, Eastman Chemical Company (EMN - Free Report) .

Eastman Chemical witnessed higher profits in the second-quarter 2017, aided by its cost management actions, disciplined capital allocation and growth of high-margin products. The company recorded profit of $292 million or $2.00 per share, up roughly 15% from the year-ago figure of $255 million or $1.71.

Barring one-time items, earnings were $1.98 per share for the quarter, up from $1.68 in the year-ago quarter. The figure topped the Zacks Consensus Estimate of $1.89 per share.

Revenues rose around 5% year over year to $2,419 million in the quarter, beating the Zacks Consensus Estimate of $2,366 million. 

Eastman Chemical has outperformed the industry it belongs to over the past year. The company’s shares have rallied around 24.5%, compared with roughly 17.9% gain recorded by the industry in the same period.


Eastman Chemical, in second-quarter earnings call, noted that it expects growth to be driven on the back of innovation and high margin products amid an uncertain global business environment. It believes that disciplined capital allocation and aggressive cost management policies should contribute to earnings growth and help offset challenges faced by the company in Fibers and ethylene pricing.

Factoring in strong first-half results, the company now expects adjusted earnings per share for 2017 to grow 10-12% year over year, up from its earlier view of 8-12%.

Eastman Chemical remains focused on cost-cutting and productivity actions. The company is looking to deliver $100 million of cost savings in 2017.

Eastman Chemical remains committed to reduce debt and boost shareholder returns. The company returned around $325 million to its shareholders during first-half 2017. It expects to deliver strong earnings growth and generate solid free cash flow (of around $1 billion) in 2017.

Eastman Chemical is also gaining from synergies of acquisitions, especially Taminco Corporation. The Taminco acquisition has provided attractive cost and revenue synergy opportunities.

However, Eastman Chemical continues to witness pricing pressure in some of its businesses. Lower prices of acetate tow are hurting its Fibers unit. Moreover, the company expects ethylene prices to be lower in second-half 2017 vis-à-vis the first half. As such, ethylene margins are expected to be under pressure in the second half. Eastman Chemical is also exposed to a volatile raw material pricing environment.

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

Stocks to Consider

Some better-ranked stocks in the basic materials space are The Chemours Company (CC - Free Report) , POSCO and Kronos Worldwide Inc. (KRO - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Chemours has expected long-term earnings growth rate of 15.5%.

POSCO has expected long-term earnings growth rate of 5%.

Kronos has expected long-term earnings growth rate of 5%.

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