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Eastman Chemical Cut to Neutral

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We are downgrading our recommendation on Eastman Chemical Company (EMN - Free Report) to Neutral following its mixed third-quarter 2012 results. Adjusted earnings of $1.57 a share topped the Zacks Consensus Estimate of $1.42. However, profit slipped 11% on hefty acquisition and other charges.

Revenues jumped 25% year over year to $2,259 million riding on the contributions of Solutia acquisition. But it missed the Zacks Consensus Estimate of $2,368 million. Eastman Chemical saw growth across all geographic regions in the quarter. The company raised its adjusted earnings forecast for 2012 to a range of $5.30 to $5.40 a share from its earlier view of $5.30.

Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses, is driving earnings. The company also benefits from business restructuring and cost-cutting measures.

The acquisition of Solutia Inc. represents a major step in Eastman Chemical’s strategy to boost its foothold in the emerging markets. Especially, the acquisition should significantly accelerate the company’s growth efforts and offer lucrative opportunities in Asia Pacific. It expects meaningful revenue synergies by leveraging technology and business capabilities and overlapping end-markets of both companies.

Eastman Chemical should also benefit from increased capacity additions. Its non-phthalate plasticizer manufacturing facility in Texas City will produce “Eastman 168” non-phthalate plasticizer, increasing its capacity by roughly 60%. Eastman Chemical 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 mid-2013.

However, Eastman Chemical is expected to witness a sluggish fourth quarter and higher raw material and energy costs towards the end of 2012. Especially, the price of propane is expected to rise, thereby impacting the margins in the company’s Specialty Fluids and Intermediates segment.

Moreover, a challenging condition in Europe coupled with low capacity utilization is affecting the profitability of Eastman Chemical’s Advanced Materials segment. The company expects earnings in this division to decline in the fourth quarter, partly due to weak demand across Europe and Asia. In addition, lower pricing is impacting the results across most of the company’s reporting segments.

Eastman Chemical, which competes with The Dow Chemical Company , EI DuPont de Nemours and Company and Celanese Corporation (CE - Free Report) , currently retains a short-term Zacks #3 Rank (Hold).

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