When it comes to developing a formula for growth, who better
thanEastman Chemical (
) to come up with the right mix of ingredients?
Through a series of divestitures and acquisitions over the
past several years, Eastman has reduced its exposure to
cyclical commodity chemical markets and increased its emphasis on
the faster-growing, more stable specialty chemicals businesses.
The company has also expanded its reach geographically in the
Asia Pacific region and other emerging markets.
Its efforts have paid off. Eastman has sparked a favorable
reaction on Wall Street as it's shown consistent earnings growth
while transforming into more of a specialty chemicals
"Investors usually award a higher valuation to specialty
chemicals producers than commodity chemicals producers," said
S&P Capital IQ equity analyst Stuart Benway.
The reason: There's more consistency in profits in specialty
chemicals, while in a highly cyclical business like commodity
chemicals there can be wide swings in profits, he says.
Eastman boasts a strong portfolio of specialty businesses that
hold leading positions and provide products that enhance
performance in a variety of end markets such as transportation,
building and construction, and consumables. They include
specialty chemicals, such as an additive that reduces tire wear,
materials that prevent auto glass from shattering and a fiber
used in manufacturing cigarettes and yarn.
The big draw for investors is Eastman's earnings growth, which
has been "fairly strong and fairly consistent," says Benway.
Sales and earnings have climbed by at least 25% for three
straight quarters. In the most recent first quarter, earnings
popped 33% to $1.62 a share. Sales shot up 27% to $2.3
Despite ongoing economic uncertainty, Eastman's end markets,
particularly the transportation and building and construction
markets, benefited from continued economic growth in Asia and
modest economic growth in the U.S., says a company filing with
Operating earnings rose to $393 million from $339 million the
prior year. The increase came amid lower raw material and energy
costs, which more than offset lower selling prices.
A big lift came from the $4.8 billion acquisition of
performance and specialty chemicals producer Solutia in July.
Solutia supplies specialty films and additives into the
automotive, building and construction, and renewable energy
Solutia brought a lot to the table. It added more than $2
billion in annual sales, says Benway, and expanded Eastman's
presence in emerging markets.
The buy accelerated Eastman's growth efforts in Asia Pacific.
With Solutia in the mix, Eastman expects to have a compound
annual growth rate in Asia Pacific approaching 10% for the next
At the time of the buy, Eastman identified annual cost
synergies of roughly $100 million it expected to achieve by
Eastman also expects to realize tax benefits from Solutia's
historical net operating losses and other tax advantages that it
expects to contribute to free cash flow of roughly $1.0 billion
On the product front, the buy added a handful of specialty
businesses to Eastman Chemical's portfolio. Solutia's rubber
chemicals used by the tire industry are the firm's most
attractive asset, wrote Morningstar analyst Jeffrey Stafford in a
"Rubber chemicals look to fit alongside acetate tow as
Eastman's most profitable business lines going forward," he said.
"In acetate tow, a main component of cigarette filters, Eastman
benefits from a low-cost production method using coal as a
feedstock. In general, this business is relatively immune to
cyclical downturns and should help stabilize earnings over
Among Solutia's products for the tire industry is Crystex
insoluble sulfur, an additive that slows the wear on tires.
Another Solutia product is Saflex, a material used in
commercial glass and auto windshields that limits shattered glass
Eastman has made other acquisitions over the years, including
the 2011 purchase of Scandiflex do Brasil S.A. Industrias
Quimicas, a maker of plasticizers. Plasticizers are additives
that increase the plasticity or fluidity of a material. The buy
helped expand Eastman's presence in Latin America and expanded
its product portfolio.
It's also divested more than $3 billion in sales from
underperforming business lines over the past several years, notes
Stafford. That included the 2011 sale of its Performance Polymers
PET business, related assets, and technology to DAK Americas.
Eastman is the former supplier of chemicals to the now-defunct
camera company Eastman Kodak.
It generates roughly half of sales outside the U.S. and
Canada. It's a top player in many of its markets. It's the
second-largest acetate tow manufacturer in the world. Competitors
in the fibers market for acetate tow include Celanese Corp. (
)and Mitsubishi Rayon Co. Ltd.
The company forecasts global growth in demand for filter tow
of 1% to 2% annually over the next several years with Asia
accounting for more than 50% of the growth, wrote Benway in a
Eastman is the world's largest non-phthalate plasticizer
manufacturer and the second-largest resin manufacturer. Eastman's
major competitors in this segment include large multinational
companies such as BASF andExxon Mobil (
Stafford says Eastman's coal gasification production technique
provides a low-cost base for many of its products.
"Competitors have been reluctant to replicate this process
because of high upfront costs," he said.
Meanwhile, Eastman's prospects are bright, despite head
"We expect our leadership positions in key end markets, the
diversity of the end markets we serve, and our broad geographic
footprint to continue to position us well for strong earnings
growth," said CEO Jim Rogers when reporting first-quarter results
April 25. "However, global economic uncertainty continues with
particular weakness in Europe, and raw material and energy costs
Still with the integration of the Solutia buy on track and
continued momentum in its end markets, he maintained his 2013
full-year earnings per share guidance of between $6.30 and
Analysts polled by Thomson Reuters see 2013 earnings rising
18% to $6.35 a share. They expect an 11% rise in 2014 and in
Separately, in May, Mark Costa was named chief executive
effective Jan. 1, 2014. Costa, who had been executive vice
president, was also named president effective immediately. He
replaces Rogers, who will continue to serve in his post as
chairman after Costa takes the helm.