Eastman Chemical Co (EMN): An Undervalued Gem in the Chemicals Industry?
Eastman Chemical Co (NYSE:EMN) recently recorded a daily gain of 2.41%, contributing to a three-month gain of 3.72%. With an Earnings Per Share (EPS) (EPS) of 5.86, the question arises: Is the stock modestly undervalued? This article aims to provide an in-depth valuation analysis of Eastman Chemical Co. We invite you to delve into the following assessment to gain valuable insights into the company's financial health and future prospects.
Company Overview
Established in 1920 to produce chemicals for Eastman Kodak, Eastman Chemical Co has evolved into a global specialty chemicals company. With manufacturing sites worldwide, the company generates the majority of its sales outside of the United States, maintaining a strong presence in Asian markets. Over the years, Eastman Chemical Co has strategically divested noncore businesses, focusing on higher-margin specialty product offerings.
With a stock price of $83.25, Eastman Chemical Co has a market cap of $9.90 billion. Comparing the stock price with the company's GF Value, an estimation of fair value, provides a preliminary understanding of the company's value. The income breakdown of Eastman Chemical Co is as follows:
Understanding GF Value
The GF Value represents our unique calculation of a stock's current intrinsic value. The GF Value Line on our summary page provides an overview of the stock's fair trading value, considering three key factors: historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future business performance estimates.
Our analysis suggests that Eastman Chemical Co's stock is modestly undervalued. If the stock price significantly exceeds the GF Value Line, the stock may be overvalued, predicting poor future returns. Conversely, if the stock price is significantly below the GF Value Line, the stock may be undervalued, forecasting higher future returns.
Given that Eastman Chemical Co is relatively undervalued, the long-term return of its stock is likely to exceed its business growth.
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Assessing Financial Strength
Investing in companies with poor financial strength poses a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Key indicators such as the cash-to-debt ratio and interest coverage provide valuable insights into a company's financial health. Eastman Chemical Co has a cash-to-debt ratio of 0.08, ranking worse than 90.98% of companies in the Chemicals industry. The overall financial strength of Eastman Chemical Co is 5 out of 10, indicating fair financial health.
Here is the debt and cash of Eastman Chemical Co over the past years:
Profitability and Growth
Investing in profitable companies generally carries less risk, especially if they have consistently demonstrated profitability over the long term. Eastman Chemical Co has been profitable for 10 years out of the past 10 years. In the past 12 months, the company reported revenues of $9.80 billion and an EPS of $5.86. Its operating margin of 10.78% is better than 67.03% of companies in the Chemicals industry. Overall, GuruFocus ranks Eastman Chemical Co's profitability as strong.
One of the most important factors in a company's valuation is its growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Eastman Chemical Co is 8.2%, ranking worse than 53.75% of companies in the Chemicals industry. The 3-year average EBITDA growth is 1.6%, ranking worse than 67.25% of companies in the Chemicals industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Eastman Chemical Co's ROIC was 7.76, while its WACC came in at 8.44.
The historical ROIC vs WACC comparison of Eastman Chemical Co is shown below:
Conclusion
In conclusion, Eastman Chemical Co (NYSE:EMN) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 67.25% of companies in the Chemicals industry. For more information about Eastman Chemical Co stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
