EUR 850.00 For Business Accounts Only

Morningstar | Eastman Reports Decent 2Q; We Maintain Our $95 FVE

Eastman Chemical reported decent second-quarter results, as operating profits grew over 6% year on year to $447 million. In the earnings release, management maintained its 2018 guidance for adjusted earnings per share growth between 10% and 14% versus 2017. We think this is achievable, but we continue to expect Eastman to come in closer to the bottom of management's range. With our forecast largely unchanged, we maintain our $95 per share fair value estimate. Our narrow moat rating, based on the company’s intangible assets in the form of patents for its specialty chemicals, remains intact.

In the advanced-materials segment, operating earnings grew roughly 5% year on year to $144 million during the quarter as an 11% revenue growth was partially offset by higher inputs costs. The revenue growth was driven by higher sales of premium products, which include Eastman’s market-leading Saflex acoustic interlayers and heads-up display products sold to the automotive industry. We note that these specialty products are not always priced based on raw materials costs. As a result, in the near term Eastman is less likely to pass along raw materials price increases. However, over the long term, we continue to forecast increased demand for Saflex, as heads-up display devices are installed in a greater proportion of vehicles, and acoustic interlayers, which should drive segment profit growth.

In the fibers segment, which primarily produces acetate tow used for cigarette filters, revenue grew 12% versus the prior year. Nearly all of the growth is attributable to a new revenue recognition accounting standing and the movement of some textile products into the fibers segment from the "other" segment. However, in acetate tow, which accounts for nearly 90% of segment sales, volumes grew compared with the second quarter of 2017. After three years of double-digit profit declines in acetate tow due to massive industry oversupply, we think the capacity reductions by all of the major players have finally balanced supply and demand, and we expect to see some profit growth in 2018. Over the long term, however, we continue to expect sales to fall at a low-single-digit rate, in line with the decline in global cigarette sales.