Is Eastman Chemical a Bargain Here?

With shares of Eastman Chemical Co. (NYSE:EMN) trading at around $66.35, is EMN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The Eastman Chemical situation comes down to one simple conclusion. Prior to getting to that conclusion, let’s take a look at several positives for Eastman Chemical:

  • Consistent revenue improvements on an annual basis
  • Strong cash flow
  • Growth through acquisitions
  • Diversified chemical portfolio
  • Diverse downstream business
  • Effective cost-cutting
  • Increased capacity
  • Acquisition of Solutia increases presence in emerging markets
  • Expects compound annual growth rate of 10 percent over next few years

On a fundamental basis, the biggest negative for Eastman Chemical is subpar debt management. However, there is a bigger concern, which we’ll cover soon.

For now, let’s take a look at some comparative numbers. The chart below compares fundamentals for Eastman Chemical, Air Products & Chemicals (NYSE:APD), and The Dow Chemical Company (NYSE:DOW). Eastman Chemical has a market cap of $10.20 billion, Air Products & Chemicals has a market cap of $17.62 billion, and Dow Chemical has a market cap of $36.35 billion.

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

EMN

APD

DOW

Trailing   P/E

22.67

15.19

43.11

Forward   P/E

9.31

13.28

10.41

Profit   Margin

5.39%

12.15%

2.08%

ROE

17.98%

16.70%

4.84%

Operating   Cash Flow

$1.13 Billion

 $1.65 Billion

 $4.08 Billion

Dividend   Yield

1.80%

3.30%

4.20%

Short   Position

1.80%

2.00%

1.70%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Weak  

The debt-to-equity ratio for Eastman Chemical is weaker than the industry average of 0.90. The debt-to-equity ratio isn’t terrible, but if it remains at this level, then it will lead to challenges when interest rates increase.

Debt-To-Equity

Cash

Long-Term Debt

EMN

1.58

$249.00 Million

$4.78 Billion

APD

0.89

$545.90 Million

$6.06 Billion

DOW

0.96

$4.17 Billion

$21.11 Billion

 

T = Technicals Are Mixed  

Eastman Chemical has performed exceptionally well over a three-year time frame as well as over the past year, but that momentum has reversed over the past three months.

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

1 Month

Year-To-Date

1 Year

3 Year

EMN

-8.69%

-2.19%

26.16%

117.40%

APD

-5.11%

1.83%

-2.79%

21.42%

DOW

-9.81%

-5.68%

-9.15%

8.54%

 

At $66.35, Eastman Chemical is trading below its 50-day SMA and 100-day, and above its 200-day SMA.

50-Day   SMA

70.63

100-Day   SMA

68.67

200-Day   SMA

61.71

 

E = Earnings Have Been Steady                

Revenue has consistently improved on an annual basis, but earnings suffered a setback in 2012.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

5.94

4.40

5.84

7.18

8.10

Diluted   EPS ($)

2.28

0.93

2.88

4.52

2.93

 

When we look at the last quarter on a year-over-year basis, we see an improvement in revenue and a decline in earnings.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   billions

1.72

1.82

1.85

2.26

2.17

Diluted   EPS ($)

0.13

1.12

1.27

0.99

-0.45

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

The Basic Materials sector is now negative for the year. This is a potentially ominous sign for the global economy. If the Federal Reserve trade comes to an end and the market begins to represent what the actual economy looks like, then most material stocks will suffer. There are some blue chips that will present relative safe havens, but chemical companies don’t qualify.

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

A rebound in the stock market is possible, but it would most likely be due to a Federal Reserve announcement. This trend isn’t sustainable. It would be nice to see a true economic recovery, but we will likely have to suffer through some difficult times prior to that being possible. Everything will have to reset and become affordable again in order for this to occur, which is essentially deflation. We could be experiencing a natural recovery by now if monetary policies didn’t get in the way over the past several years, but what’s done is done.

Eastman Chemical performed very poorly in 2008 and early 2009, which was a deflationary environment. This is a strong company, but due to industry exposure, it’s not capable of withstanding a steep decline in the stock market. If trends continue to go in the direction they’re currently heading, then materials will have a lot more suffering ahead. It’s one of the last places an investor would want to be. Once again, a stock market bounce is possible, which would favor Eastman Chemical, but this is about the long term.

Eastman Chemical is a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.