We are downgrading our recommendation on
Eastman Chemical Company
) to Neutral following its mixed third-quarter 2012 results.
Adjusted earnings of $1.57 a share topped the Zacks Consensus
Estimate of $1.42. However, profit slipped 11% on hefty
acquisition and other charges.
Revenues jumped 25% year over year to $2,259 million riding on
the contributions of Solutia acquisition. But it missed the Zacks
Consensus Estimate of $2,368 million. Eastman Chemical saw growth
across all geographic regions in the quarter. The company raised
its adjusted earnings forecast for 2012 to a range of $5.30 to
$5.40 a share from its earlier view of $5.30.
Eastman Chemical's diversified chemical portfolio, along with its
integrated and diverse downstream businesses, is driving
earnings. The company also benefits from business restructuring
and cost-cutting measures.
The acquisition of Solutia Inc. represents a major step in
Eastman Chemical's strategy to boost its foothold in the emerging
markets. Especially, the acquisition should significantly
accelerate the company's growth efforts and offer lucrative
opportunities in Asia Pacific. It expects meaningful revenue
synergies by leveraging technology and business capabilities and
overlapping end-markets of both companies.
Eastman Chemical should also benefit from increased capacity
additions. Its non-phthalate plasticizer manufacturing facility
in Texas City will produce "Eastman 168" non-phthalate
plasticizer, increasing its capacity by roughly 60%. Eastman
Chemical is also making progress in its growth initiatives
through its joint venture in China for a 30,000-ton acetate tow
manufacturing facility, which is expected to come online in
However, Eastman Chemical is expected to witness a sluggish
fourth quarter and higher raw material and energy costs towards
the end of 2012. Especially, the price of propane is expected to
rise, thereby impacting the margins in the company's Specialty
Fluids and Intermediates segment.
Moreover, a challenging condition in Europe coupled with low
capacity utilization is affecting the profitability of Eastman
Chemical's Advanced Materials segment. The company expects
earnings in this division to decline in the fourth quarter,
partly due to weak demand across Europe and Asia. In addition,
lower pricing is impacting the results across most of the
company's reporting segments.
Eastman Chemical, which competes with
The Dow Chemical Company
EI DuPont de Nemours and Company
), currently retains a short-term Zacks #3 Rank (Hold).
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