Here's Why You Should Hold Onto Eastman Chemical For Now
Zacks Investment Research | May 20, 2019 07:27AM ET
Eastman Chemical Company (NYSE:EMN) is benefiting from its cost management actions, innovation-driven growth model and synergies of acquisitions amid challenges including a difficult global business environment, weak demand in China and Europe and currency pressures.
Shares of the chemical maker, which currently carries a Zacks Rank #3 (Hold), are down 2.6% year to date, outperforming the 12.5% decline of its industry .
What’s Going in EMN’s Favor?
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 is also focused on productivity and cost-cutting actions in the wake of the challenging business environment. It is taking a more aggressive approach to cost management this year to keep its manufacturing costs in control. Eastman Chemical expects to benefit from $40 million of additional cost actions in second-half 2019. The company is also taking actions to raise selling prices of its products amid an inflationary environment.
Eastman Chemical's cost reduction actions and growth in high-margin innovation products are expected to contribute to its earnings per share in 2019. It expects adjusted earnings per share growth of 6-10% in 2019.
Eastman Chemical is also gaining from synergies of acquisitions. The buyout of Taminco Corporation 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 also recently purchased the Marlotherm heat transfer fluids manufacturing assets in Germany and associated formulations, intellectual property and customer contracts from South Africa-based integrated energy and chemical company, Sasol. The buyout allows the company to boost its heat transfer fluids product offerings to customers globally.
Moreover, Eastman Chemical remains committed to 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. The company also returned $212 million to shareholders through share repurchases and dividends during first-quarter 2019. Eastman Chemical expects to generate solid free cash flow (of more than $1.1 billion) in 2019.
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Headwinds Persist
Eastman Chemical, in its first-quarter earnings call, said that it expects the difficult global business environment to continue through first-half 2019. The company saw lower demand for its specialty products in China and Europe in the first quarter due to trade tensions. Its profits dropped 28% year over year in the quarter, hurt by weak demand.
Sales volumes for the company’s specialty plastics are under pressure due to customer inventory destocking associated with the U.S.-China trade conflict. Volumes are likely to remain under pressure in the first half amid an uncertain trade environment.
The company also faces currency headwinds due to a stronger U.S. dollar. It expects roughly $30 million headwind associated with currency in the first half of 2019, mostly across its Additives & Functional Products and Advanced Materials units. It also anticipates higher pension expenses of around $30 million for 2019.
Eastman Chemical’s fiber segment is also hurt by lower acetate tow selling prices and sales volumes. Trade-related issues are hurting tow volumes. The company expects tow volumes to decline in 2019.
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