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Eastman Chemical (EMN) Poised on Cost Actions & Innovations

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We issued an updated research report on Eastman Chemical Company (EMN - Free Report) on Jun 4.

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) , is gaining from its innovation-driven growth model, aggressive cost management actions and synergies of acquisitions amid headwinds including weak demand in China and Europe and currency pressures.

The company remains focused on productivity and cost-cutting actions. It is taking a more aggressive approach to cost management this year to keep its manufacturing costs in control. Eastman Chemical is expected to benefit from $40 million of additional cost actions in second-half 2019.

Eastman Chemical also remains focused on growing new business revenues from innovations. It envisions new business revenues from innovation to increase to more than $400 million this year. The company also remains on track to generate roughly $500 million of new business revenues in 2020.

The company’s cost actions and growth in high-margin innovation products are expected to contribute to its earnings per share in 2019. It expects adjusted earnings per share growth of 6-10% in 2019.

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 also recently purchased the Marlotherm heat transfer fluids manufacturing assets in Germany and associated formulations, intellectual property and customer contracts from South Africa-based integrated energy and chemical company, Sasol.  The buyout allows the company to boost its heat transfer fluids product offerings to customers globally.

Moreover, Eastman Chemical remains committed to boost shareholder returns leveraging strong cash flow. The company returned $212 million to shareholders through share repurchases and dividends during first-quarter 2019. Eastman Chemical expects to generate solid free cash flow (of more than $1.1 billion) in 2019.

However, Eastman Chemical is exposed to a challenging business environment. The company, in April, said that it expects the difficult global business environment to continue through first-half 2019. The company saw lower demand for its specialty products in the first quarter in China and Europe due to trade tensions.

Sales volumes for the company’s specialty plastics are under pressure due to customer inventory destocking associated with the U.S.-China trade conflict. Volumes are likely to remain under pressure in the first half amid an uncertain trade environment.

The company also faces currency headwinds due to a stronger U.S. dollar. It expects roughly $30 million headwind associated with currency in the first half of 2019, mostly across Additives & Functional Products and Advanced Materials units. It also anticipates higher pension expenses of around $30 million for 2019.

Eastman Chemical’s fiber segment is also hurt by lower acetate tow selling prices and sales volumes. Trade-related issues are also hurting tow volumes. The company expects tow volumes to decline in 2019.

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