EMN- Eastman Chemical

[moustachio]

Eastman Chemical is a specialty Chemical manufacturer that has consistently grown earnings and is undervalued relative to it's peers. The company has a credible management team that has a goal of $8 EPS for the year of 2015. With the stock currently trading at around 85, that leaves considerable upside in the next couple of years if it trades at a normal industry valuation multiple. EMN seems to be an under followed company and stock, considering the growth it has achieved and it's high margins. Even if it doesn't get a fairer valuation compared to it's peers, it should still appreciate due to earnings growth. I think them hitting their $8 EPS goal is likely. It seems to me that wall street hasn't warmed up to this company, but as time goes on and it continues with it's impressive record, I believe they will warm up to it.

 

EPS grew by approximately 20% in 2013 and we have now delivered 4 consecutive years of double-digit earnings growth. The CAGR for EPS over the last 4 years is 34%. We had another year of strong free cash flow in 2013 generating $674 million.

( from Q4 2013 transcript)

 

Yeah, I mean as you know you look at the share repurchases as one of the mechanisms to deploy cash. I mean, our priorities for cash remain capital expenditures to support our organic growth, attractive mergers and acquisition and share repurchases as just again a good valuable use of cash. We’ve still have $900 million remaining on our authorization that our board was going up to provide us given the confidence in our financial positions and cash flows. But it will moderate, but having said that, we’re in the market today and we’ll be in the market throughout the year just not at that same pace of the first quarter and probably at a pace that’s more similar to what you’ve seen from us in the past.

(from Q1 2014 trancript). They are buying back stock and have a dividend, but seemingly aren't buying back at an aggressive enough pace for the street. I think they are under leveraged and could buy back more, but management is at least shareholder friendly.

 

The company forecasts earnings per share of approximately $6.25 in 2013 and of approximately $8 in 2015, excluding any acquisition-related costs and charges, asset impairments and restructuring costs, mark-to-market pension and OPEB adjustments, or similar items. This forecast assumes global economic growth from 2013 through 2015 of approximately 3 percent, with growth of approximately 8 percent in China, approximately 2.5 percent in the U.S., and approximately 1 percent in Europe.

(from 2012 investor day) http://www.eastman.com/Company/News_Center/2012/Pages/Eastman_Investor_Day_Highlights_Consistent_Superior_Earnings_Growth.aspx This goal has been referenced in recent earnings conference calls and the $8 EPS goal seems to still be valid.

 

 

I originally found this stock through this article: http://seekingalpha.com/article/1783762-eastman-chemical-specialty-chemical-for-a-commodity-price It is a good article and the author is a sharp guy, he is worth following on SA. One should definitely read it, as it compares EMN margins and valuations to it's peers, and makes a very strong case for EMN's undervaluation. I'm not going to reproduce or steal graphs for this topic, so check it out.

 

Another article worth reading: http://seekingalpha.com/article/1883571-eastman-chemical-a-global-recovery-growth-play-with-40-percent-upside

 

This is my first "write up" if you could call it that, in the investment ideas. I don't have too much to say, but this should be enough to pique some people's interest.

 

Disclosure: Long EMN through calls of varying expiration.

 

 

 

[constructive]

How does it compare to Celanese? That strikes me as even cheaper.

[moustachio]

How does it compare to Celanese? That strikes me as even cheaper.

 

From a brief look, according to yahoo finance, they have almost the same EV/EBITDA ratio and forward PE's. Its a good bet IMO that the earnings estimates will be fairly close to future reality. If you look at a free cash flow ratios it seems to be a little tougher to compare. EMN is pretty open about what they think their future free cash will be. CE looks like they've guided rough capex, but its a little tougher to make an accurate guess. It looks to me like EMN will have a greater free cash flow ratio, and has shown better EPS growth. To be honest, while I like EMN better, CE looks pretty damn cheap compared to the overall market as well. As a brief note, after doing a quick scan comparison of the two company's 10Ks I liked EMN's better. CE doesn't even have a table for cash flow statement, unless I somehow missed it.