Eastman Chemical (EMN) recently posted an impressive third quarter. Earnings per share was relatively flat, with net income down slightly. Revenue was up nearly 5%, but the high raw material costs prevented any margin expansion. Regardless, these numbers were higher than expected, and Eastman Chemical was able to navigate one of the most challenging macroeconomic quarters in recent memory effectively.
The revenue mix is still slightly tilted in favor of North America; however, earnings are higher overseas and we expect the continued build outs in Korea and acetate tow demand in Asia to continue to be key business drivers, as they were in the third quarter.
Eastman also continues to invest in the future via strategic acquisitions. In the third quarter, the firm acquired Sterling, a plasticizer business that expects to be accretive to revenues and earnings, as the demand for non-phthalate plasticizer grows in the US and abroad. Management expects this capacity expansion to be online in 2014. The hope is that by then the US and European housing markets will be primed for recovery and maybe even expansion. Since most of Eastman’s businesses are highly capital intensive but require low marginal costs, an accelerated economic recovery could lead to material earnings expansion.
Though the third quarter was better than expected, and the company projects to generate around $200 million in free cash flow for 2011, fears of a Eurozone recession are not only real, but a serious threat to some of Eastman’s businesses. Regardless, management remains confident that the company will still earn north of $4.64 per share for the year.
With management buying back cheap stock and providing cash returns via a consistent dividend, we think Eastman Chemical remains a compelling diversified chemical play with a chance to really expand earnings in the event of a better-than-expected recovery.