Global specialty materials supplier Eastman Chemical Company (EMN) in Kingsport, Tenn., produces a broad range of innovative products and solutions used in construction, consumables, transportation, and other markets. Its record growth in sales revenue driven by an innovation-led growth model has enabled EMN to maintain strong cash flow and make significant progress in the fourth quarter of 2021.
Investor optimism surrounding the specialty chemicals company’s plans to invest up to $1 billion to build the world’s largest molecular-plastic recycling facility in France has helped its stock gain 7.4% in price over the past three months.
The company expects its adjusted EPS to be in the range of $9.50 - $10 in 2022, because it continues to see strong demand from its end markets. EMN’s management expects operating cash flow to be greater than $1.6 billion despite headwinds, including inflation, logistics, and supply chain challenges. Because it benefits from a significantly lower cost structure and strong cash generation, EMN is well-positioned to achieve record growth this year and beyond.
Here is what we think could shape EMN’s performance in the near term:
Strategic Investment to Accelerate Circular Economy
This month, EMN and French President Emmanuel Macron jointly announced the company’s plans to invest as much as $1 billion to develop a material-to-material molecular recycling facility in France. The specialty chemicals company also plans to build an innovation center for molecular recycling to support France’s leadership role in the circular economy. The multi-phase project will begin operations in 2025, recycling up to 160,000 tons of hard-to-recycle plastic waste annually.
Mark J. Costa, CEO of EMN, said, “The investment in France is a significant step forward in Eastman's strategy to accelerate a circular economy globally.”
Solid Growth Story
The $2.28 consensus EPS estimate for the current quarter, ending March 31, 2022, indicates a 7% improvement year-over-year. Furthermore, its EPS is expected to rise 7.6% in the current year and 20.4% over the next five years. EMN has an impressive earnings history; it beat the consensus EPS estimates in each of the trailing four quarters. Analysts expect EMN’s revenue to rise 3.3% year-over-year to $2.41 billion in the current quarter.
EMN’s revenue has increased at a 3.1% CAGR over the past five years. Also, its EBITDA has grown at a 3.7% CAGR over the past three years.
Impressive Financials
EMN’s sales revenue increased 23.2% year-over-year to $2.69 billion in the fourth quarter, ended Dec. 31, 2021. Its advanced materials sales grew 15%, due mainly to higher sales volume/mix and higher selling prices. The company’s gross profit rose 6.3% year-over-year to $559 million. Also, its net income increased significantly year-over-year to $380 million, while its net cash provided by operating activities grew 5.9% from the year-ago value to $430 million.
The company’s 17.8% trailing-12-month EBIT margin is 29.8% higher than the 13.7% industry average. Also, its 14.1% trailing-12-month ROE is 17.3% higher than the 12% industry average.
Reasonable Valuation
The company’s 12.17x forward non-GAAP P/E ratio is 15.2% lower than the 14.34x industry average. And in terms of forward non-GAAP PEG, the company is currently trading at 0.76x, which is 38% higher than the 1.22x industry average. The stock’s 10.92 trailing-12-month EV/EBIT ratio compares favorably with the 12.56 industry average.
POWR Ratings Reflect Promising Outlook
EMN has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. EMN has a B grade for Growth, which is consistent with analysts’ expectations that its revenue and earnings will grow.
Also, in terms of Quality Grade, EMN has a B. The stock’s higher-than-industry ROE is in sync with this grade.
Click here to see the additional POWR Ratings for EMN (Value, Stability, Sentiment, and Momentum).
The stock is ranked #27 of 90 stocks in the Chemicals industry.
Bottom Line
EMN’s robust portfolio of innovative technologies and increased organic growth investments uniquely positions it to capitalize on the solid end-market demand for specialty plastics. In addition, the company’s higher sales volume and relative undervaluation should help it stand out in its industry. Therefore, we think the stock is a good bet now.
How Does Eastman Chemical Company (EMN) Stack Up Against its Peers?
EMN has an overall B rating in our proprietary rating system. Check out these other stocks within the Chemicals industry with A (Strong Buy) ratings: Covestro AG (COVTY), Arkema S.A. (ARKAY), and AGC Inc. (ASGLY).
EMN shares were unchanged in premarket trading Monday. Year-to-date, EMN has declined -2.26%, versus a -6.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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