Eastman Chemical Company EMN is benefiting from growth in its specialty businesses, its cost management actions, innovation-driven growth model and synergies of acquisitions amid headwinds including raw material cost inflation.
Shares of the chemical maker, which currently carries a Zacks Rank #3 (Hold), have gained 11.7% year to date, outperforming the 4.7% decline of its industry.
What’s Going in EMN’s Favor?
Eastman Chemical is benefiting from growth of its high margin specialty products. Strong volume growth in the company’s specialty businesses contributed to a 6% growth in its revenues in 2018.
Eastman Chemical remains focused on growing new business revenues from innovations. It envisions new business revenues from innovation to increase to more than $400 million this year. The company also remains on track to generate roughly $500 million of new business revenues in 2020.
The company’s high margin products and its aggressive cost management actions are expected to support its earnings in 2019. It expects adjusted earnings per share growth of 6-10% in 2019.
The company’s focus on productivity and cost-cutting actions is also helping it to offset raw material cost inflation and other cost headwinds. It is taking a more aggressive approach to cost management this year to keep its manufacturing costs in control. Eastman Chemical's cost reduction actions are expected to contribute to its earnings per share in 2019.
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.
Moreover, Eastman Chemical remains committed to reduce debt and boost shareholder returns. The company generated cash from operating activities of $1.54 billion and free cash flow of $1.08 billion during 2018 and returned $718 million to shareholders through share repurchases and dividends during the year. Eastman Chemical expects to generate solid free cash flow (of more than $1.1 billion) in 2019.
Eastman Chemical, in its fourth-quarter 2018 earnings call, said that it sees slower economic growth in 2019 and expects some of the challenges it witnessed in the fourth quarter to continue in the first quarter of 2019.
Eastman Chemical has been seeing a spike in raw materials costs, mostly in its chemical intermediates unit. Raw materials cost headwind is expected to persist in first-quarter 2019. The company also faces headwind from higher energy and distribution costs as witnessed in the last reported quarter. It is taking actions to raise selling prices of its products amid the inflationary environment.
The company is also witnessing lower demand for its specialty products in China. Sales volumes for specialty plastics are under pressure due to customer inventory destocking associated with the U.S.-China trade conflict. The company also expects unfavorable impact of a strengthening U.S. dollar and higher pension costs in 2019.
Eastman Chemical Company Price and Consensus
Eastman Chemical Company Price and Consensus | Eastman Chemical Company Quote
Stocks to Consider
Stocks worth considering in the basic materials space include Kirkland Lake Gold Ltd. KL, Ingevity Corporation NGVT and W. R. Grace & Co. GRA.
Kirkland has an expected earnings growth rate of 51.5% for the current year and carries a Zacks Rank #1 (Strong Buy). The company’s shares have surged around 85% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ingevity has an expected earnings growth rate of 17.9% for the current year and carries a Zacks Rank #2 (Buy). Its shares have rallied roughly 48% in the past year.
W. R. Grace has an expected earnings growth rate of 10.4% for the current year and carries a Zacks Rank #2. Its shares have gained around 17% in the past year.
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