On Nov 4, we reiterated our Neutral recommendation on chemicals maker Eastman Chemical (EMN). While the company should gain from Solutia acquisition, cost-cutting measures and capacity additions, we prefer to tread with caution considering raw material cost pressures and a weak European market.
Eastman Chemical, a Zacks Rank #3 (Hold) stock, posted better-than-expected third-quarter 2013 results on Oct 24 with both revenues and adjusted earnings coming ahead of Zacks Consensus Estimates. Profit doubled year over year on strength across Additives and Functional Products and Advanced Materials divisions.
The company, however, cut its earnings guidance for the full year, factoring in higher raw material and energy costs and sustained challenges in its Adhesives and Plasticizers business.
Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses remains its strength. It also benefits from business restructuring and cost-cutting measures.
The acquisition of Solutia represents a major step in Eastman Chemical’s strategy to boost its foothold in the emerging markets, especially in Asia Pacific. The company sees cost synergies of more than $100 million this year.
Eastman Chemical should also gain from increased capacity additions. The acetate tow manufacturing facility, the company’s joint venture investment in China, is now in operation and earnings benefit from the joint venture is expected to begin in early 2014.
Moreover, Eastman Chemical is seeing strong adoption of Tritan copolyester product line and it is increasing Tritan capacity at its Kingsport facility by around 25%. It is also expanding capacity for its Therminol heat transfer fluids.
However, uncertainty regarding the timing of a recovery in Europe remains a concern. Automobile as well as building and commercial construction markets remain soft in Europe.
Moreover, Eastman Chemical remains exposed to volatility in raw material costs and pricing pressure. Weak demand for adhesives resins in specific markets is also affecting sales in its Adhesives and Plasticizers segment.
Other Stocks to Consider
Other companies in the chemical industry with favorable Zacks Rank are Asahi Kasei Corp (AHKSY), Methanex Corp (MEOH) and PPG Industries Inc. (PPG). While both Asahi Kasei and Methanex hold a Zacks Rank #1 (Strong Buy), PPG Industries retains a Zacks Rank #2 (Buy).