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Eastman Chemical (EMN) Poised on Cost Actions & Acquisitions

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We issued an updated research report on Eastman Chemical Company (EMN - Free Report) on Nov 22.

The chemical maker saw its profits rise in the third quarter of 2018, aided by strong growth in its specialty businesses and cost management actions. The company recorded profit of $412 million or $2.89 per share, up roughly 28% from the year-ago figure of $323 million or $2.22. Adjusted earnings of $2.34 per share topped the Zacks Consensus Estimate of $2.29.

Revenues rose around 3% year over year to $2,547 million in the quarter, also exceeding the Zacks Consensus Estimate of $2,534.9 million.

Eastman Chemical, in its third-quarter call, noted that strong volume gains in the specialty businesses, disciplined cost management and a lower effective tax rate helped it achieve adjusted earnings per share growth of 13% year over year during the first nine months of 2018. The company continues to expect adjusted earnings per share growth for 2018 to be 10-14% year over year.

Eastman Chemical’s shares have lost around 11.9% over a year, outperforming the roughly 20.5% decline of its industry.


 

Eastman Chemical’s high margin products and its aggressive cost management actions are likely to continue to drive its earnings. The company should gain from sustained growth of its high margin specialty products.

The company’s focus on productivity and cost-cutting actions is also helping it to offset raw material cost inflation and other cost headwinds. Eastman Chemical expects to realize $100 million of cost savings in 2018, under its cost-reduction program.

Eastman Chemical should also gain from synergies of acquisitions, especially Taminco Corporation. The buyout has strengthened the company’s foothold in promising niche end-markets including food, feed and agriculture. The acquisition has also provided attractive cost and revenue synergy opportunities. The company is making a good progress in delivering synergies from the Taminco acquisition.

Moreover, the company is committed to boost shareholder returns, leveraging strong free cash flow. Eastman Chemical returned roughly $615 million to shareholders during the first nine months of 2018. The company also expects to generate roughly $1.1 billion of free cash flow in 2018.

However, Eastman Chemical has been seeing a spike in raw materials costs, mostly in its chemical intermediates and additives and functional products units, as witnessed in the third quarter. Raw materials cost headwind is expected to persist through the remainder of 2018. The company also faces headwind from higher energy costs. It is taking actions to raise selling prices of its products amid the inflationary environment.

The company’s Fibers segment is also exposed to certain challenges. The division’s results were hurt by lower acetate tow sales volume and selling prices due to reduced industry capacity utilization in the third quarter. The company expects profits for the segment to be modestly lower on a year over year basis for full-year 2018.

Zacks Rank & Stocks to Consider

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

Better-ranked stocks worth considering in the basic materials space include The Mosaic Company (MOS - Free Report) , CF Industries Holdings, Inc. (CF - Free Report) and Methanex Corporation (MEOH - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mosaic has expected long-term earnings growth rate of 7%. Its shares have surged 49% in the past year.

CF Industries has expected long-term earnings growth rate of 6%. Its shares have rallied 23% in a year.

Methanex has expected long-term earnings growth rate of 15%. Its shares have gained 9% in the past year.

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