Eastman Chemical Company EMN is gaining from strong growth in its specialty businesses, its cost management actions and synergies of acquisitions amid headwinds from higher raw material prices.
Shares of the chemical maker, which currently carries a Zacks Rank #3 (Hold), have lost 23.2% over the past year, outperforming the 27.8% decline of its industry.
What’s Going in EMN’s Favor?
Eastman Chemical’s high margin products and its aggressive cost management actions are driving its earnings. The company is benefiting from sustained growth of its high margin specialty products.
Eastman Chemical, in its third-quarter call, noted that strong volume gains in the specialty businesses, disciplined cost management and a lower effective tax rate helped it achieve adjusted earnings per share growth of 13% year over year during the first nine months of 2018. The company continues to expect adjusted earnings per share growth for full-year 2018 to be 10-14% year over year.
The company’s focus on productivity and cost-cutting actions is also helping it to offset raw material cost inflation and other cost headwinds. Eastman Chemical expects to realize $100 million of cost savings for 2018, under its cost-reduction program.
Eastman Chemical is also gaining 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 is making a good progress in delivering synergies from the Taminco acquisition.
Moreover, the company is committed to boost shareholder returns, leveraging strong free cash flow. Eastman Chemical returned roughly $615 million to shareholders during the first nine months of 2018. The company also expects to generate roughly $1.1 billion of free cash flow for full-year 2018.
Eastman Chemical's board, in December 2018, also hiked its quarterly cash dividends by 11% to 62 cents per share from 56 cents. The company raised the dividend for the ninth straight year in sync with its commitment towards balanced and disciplined capital allocation and shareholders returns.
Eastman Chemical has been seeing a spike in raw materials costs, mostly in its chemical intermediates and additives and functional products units. Raw materials cost headwind is expected to persist. The company also faces headwind from higher energy costs. It is taking actions to raise selling prices of its products amid the inflationary environment.
The company’s Fibers segment is also exposed to certain challenges. The division’s results were hurt by lower acetate tow sales volume and selling prices due to reduced industry capacity utilization in the third quarter. The company expects profits for the segment to be modestly lower on a year over year basis for full-year 2018.
Stocks to Consider
A few better-ranked stocks worth considering in the basic materials space include Ingevity Corporation NGVT, Quaker Chemical Corporation KWR, Israel Chemicals Ltd. ICL.
Ingevity has an expected earnings growth rate of 21.5% for the current year and carries a Zacks Rank #1 (Strong Buy). Its shares have gained 15% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Quaker Chemical has an expected earnings growth rate of 21.1% for the current year and carries a Zacks Rank #2 (Buy). Its shares have gained 16% in the past year.
Israel Chemicals has an expected earnings growth rate of 2.7% for the current year and carries a Zacks Rank #2. The company’s shares have rallied 39% over the past year.
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