Will Eastman Chemical’s Stock Continue to Trend Higher?

With shares of Eastman Chemical Co. (NYSE:EMN) trading at around $73.75, 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

Eastman Chemical is trading up 3.66 percent so far today. Part of this is due to the strength of the market, but the majority of the move comes from good news related to earnings.

Q4 EPS came in at $1.19, which was in-line with estimates. Q4 revenue came in at $2.17 billion, which missed the average estimate of $2.25 billion. Nevertheless, this was still a 25 percent increase year-over-year. Q4 results included sales revenue from Solutia. FY2012 EPS was $5.38. In 2012, Eastman Chemical generated $1.1 billion in cash from operating activities as well as $471 million in cash flow. As far as all-important guidance goes, FY2013 EPS is expected to come in between $6.30 and $6.40. This is strong.

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Eastman Chemical is fairly valued with a Trailing P/E of 18.62. The Forward P/E is 11.26. Margins are average at best, but earnings are strong on a consistent basis, and there is good cash generation. A combination of the Solutia acquisition, cost-cutting measures, restructuring, increased capacity, and strong guidance make for a strong likelihood of future success, but let’s take a look at the big picture prior to forming an opinion.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio and balance sheet for Eastman Chemical are weak. The good news is that unlike many other companies that are operating for maximum near-term profits, Eastman Chemical is conscious of the problem and working to correct it for the best long-term results.

Debt-To-Equity

Cash

Long-Term Debt

EMN

1.66

$237.00 Million

$4.87 Billion

DOW

0.82

$3.89 Billion

$19.96 Billion

CE

1.79

$1.01 Billion

$2.93 Billion

 

T = Technicals on the Stock Chart Are Stong  

Eastman Chemical has outperformed The Dow Chemical Corporation (NYSE:DOW) and Celanese Corporation (NYSE:CE) for every timeframe listed below.

It should be noted that Eastman Chemical currently yields 1.70 percent whereas Dow Chemical yields 3.70 percent. However, the difference in stock appreciation over the past three years more than offsets the difference in yield. Celanese Corporation yields 0.60 percent.

1 Month

Year-To-Date

1 Year

3 Year

EMN

8.63%

8.63%

43.79%

164.70%

DOW

0.61%

0.61%

-0.45%

24.12%

CE

6.15%

6.15%

-5.91%

59.83%

 

At $73.75, Eastman Chemical is currently trading above all its averages.  

50-Day SMA

66.13

100-Day SMA

61.61

200-Day SMA

56.03

 

E = Earnings and Revenue Have Been Steady         

Earnings and revenue have been steady since 2009. Revenue and earnings have exceeded 2007 levels, which is an excellent sign.

2007

2008

2009

2010

2011

Revenue ($)in billions

6.83

5.94

4.40

5.84

7.18

Diluted EPS ($)

1.79

2.28

0.93

2.96

4.86

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.81

1.72

1.82

1.85

2.26

Diluted EPS ($)

1.22

0.47

1.12

1.27

0.99

 

T = Trends Might Support the Industry

Despite the run in the stock market, there is still global uncertainty. The biggest concern is still Europe, which affects Eastman Chemical.

Across the board, there have also been lower selling prices due to lower raw material and selling costs, but Eastman Chemical did have higher sales in all geographic regions in Q4.

Conclusion

Eastman Chemical has a lot going for it at the moment. This includes consistent earnings and revenue growth, strong cash generation, cost-cutting and restructuring, increased capacity, the acquisition of Solutia, a diversified chemical portfolio, a fair valuation, and strong guidance. On the negative side, the balance sheet still remains in poor condition, margins aren’t impressive, and global uncertainty remains a concern.

Overall, the positives outweigh the negatives — for now. Eastman Chemical and its peers were crushed during the financial crisis. If the current environment proves to be yet another bubble aided by economic stimulus measures and the bubble bursts, then Eastman Chemical is not where you want to be. As long as the stock market remains afloat, Eastman Chemical is poised to climb higher.

Eastman Chemical is an OUTPERFORM.

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