Eastman Chemical Company EMN gains from its innovation-driven growth model, cost reduction actions and acquisitions amid certain headwinds including a difficult demand environment.
Shares of the chemical maker are down 11.2% so far this year, compared with a 16.1% decline of its industry.
Let’s find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Favoring the Stock?
Eastman Chemical's cost management actions and growth in high-margin innovation products are expected to contribute to its earnings in 2020. The company is taking an aggressive approach to cost management amid a challenging environment. In response to the coronavirus pandemic, it has significantly increased its cost reduction target, which is forecast to be roughly $150 million of net savings in 2020. These cost actions include reduction of discretionary spending.
The company is also focused on growing new business revenues from innovation. It expects to generate roughly $500 million of new business revenues in 2020. In particular, the company’s Advanced Materials unit has a number of products that are driving new business revenues.
Moreover, Eastman Chemical is gaining from its acquisitions. The purchase of Marlotherm heat transfer fluids manufacturing assets in Germany has allowed the company to boost its heat transfer fluids product offerings to customers globally. Moreover, the acquisition of Spain-based cellulosic yarn producer, INACSA reinforces the growth of the company’s textiles innovation products like Naia cellulosic yarn.
Eastman Chemical also remains focused on maintaining a disciplined approach to capital allocation, with an emphasis on financing its dividend and debt reduction.
The company is taking actions to boost its cash flows. These include reduction of capital expenditure by around $100 million to $325-375 million. The company also expects working capital to be a source of more than $250 million of cash flows this year. Eastman Chemical also expects to reduce debt by more than $400 million in 2020.
A Few Headwinds
Eastman Chemical is seeing weaker demand across certain markets. It witnessed lower demand in transportation and textile markets in the first quarter of 2020 due to the pandemic, hurting its volumes in these markets. Eastman Chemical envisions greater challenges in transportation, textiles and energy markets in the second quarter. As such, sales volumes are expected to remain under pressure in the second quarter. The company has withdrawn its guidance for 2020 due to uncertainties surrounding the pandemic.
The company also faces challenges from costs associated with idling of a number of facilities and reduction of operating rates due to the pandemic. It expects to record conversion costs related to these moves in the second quarter. This is likely to weigh on its bottom line in the quarter.
Eastman Chemical Company Price and Consensus
Eastman Chemical Company price-consensus-chart | Eastman Chemical Company Quote
Stocks to Consider
Better-ranked stocks worth considering in the basic materials space are Agnico Eagle Mines Limited AEM, Alamos Gold Inc. AGI and Franco-Nevada Corporation FNV.
Agnico Eagle has a projected earnings growth rate of 53.6% for the current year. The company’s shares have gained roughly 15% in a year. It currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alamos Gold has a projected earnings growth rate of 65% for the current year. The company’s shares have shot up around 23% in a year. It currently has a Zacks Rank #2 (Buy).
Franco-Nevada has a projected earnings growth rate of 19.2% for the current year. The company’s shares have surged around 55% in a year. It currently has a Zacks Rank #2.
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