“Shares of diversified chemical producer Eastman Chemical Co. (EMN) lost more than 37% of their value between April 29 and September 22, 2011, reflecting fear that a global economic slowdown could stifle demand for the firm’s products. Today, the stock is up a whopping 66% in the past six months.
“Despite the stock’s roller coaster ride, Eastman Chemical’s overall business never deteriorated meaningfully in 2011. In fact, operating income surged 34% in 2011, with all four product categories posting an uptick in profits. ... Eastman Chemical operates four divisions: fibers; specialty plastics; performance chemical intermediates (PCI); and coatings, adhesives, specialty polymers and inks (CASPI). ... In 2011, the cyclical PCI and CASPI business lines were buoyed by the spread between the cost of ethane and propane in North America and the global cost of ethylene and propylene, the basic building blocks of innumerable plastics and synthetic materials.
“Eastman Chemicals produces much of its ethylene and propylene in-house — a huge advantage over its competitors, particularly those with overseas operations. We expect lower propane prices, the result of an unseasonably warm winter, to widen the spread between propane and propylene prices.
“We also like the firm’s $4.5 billion purchase of Solutia (SOA), a blockbuster deal that will be immediately accretive to 2012 earnings and boost profits substantially in 2013. The acquisition bolsters Eastman Chemicals’ exposure to rising middle-class demand in China and other Asia-Pacific emerging markets, a region that management expects will grow to 28% of the combined firm’s overall revenue in 2015. Prior to the deal, the automotive industry accounted for only 7% of Eastman Chemicals’ sales; the addition of Solutia, which generates 55% of its revenue from sales of auto glass and tire-related products, will bolster the company’s exposure to this key end market.
“Eastman Chemical stands to benefit in the near term from favorable commodity prices, while the addition of Solutia offers plenty of intermediate-term opportunities. Buy Eastman Chemical on dips below 48.75.”
- Elliott H. Gue, Personal Finance, March 9, 2012