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Morningstar | Eastman's Specialty Chemicals Should Provide Stable Returns Even as the Oil-Gas Spread Narrows

Through acquisition and internal development, Eastman owns a solid portfolio of specialty chemicals. Looking to beef up its specialty chemical and materials offerings, Eastman acquired Solutia in 2012. Solutia's portfolio is weighted toward the automotive and construction markets, with components used in safety glass, window tinting, and tires, among other products. In 2014, Eastman completed the $2.8 billion acquisition of Taminco, which manufactures alkylamines and offers a solid growth profile. To invest in future patent-protected specialty products, the firm plows back roughly 4%-5% of sales from its additives and functional products and advanced materials segments into research and development.Eastman also holds a solid position in acetate tow, which is primarily used to make cigarette filters. The acetate tow industry has experienced falling prices due to overcapacity in China over the past several years. However, a handful of players dominates the industry, a factor that led to disciplined capacity shutdowns by all of the major companies during the industry downturn. While the number of U.S. smokers has continued to decline, global acetate tow sales should decline at a slower pace. About three fourths of the company's acetate tow revenue comes from outside North America. Eastman has started a joint venture in South Korea, increasing the company's acetate tow capacity by 15% to help meet Asian demand. Eastman achieves high margins in acetate tow production by using coal as a feedstock, which provides a favorable cost profile versus marginal producers who use crude oil.Eastman leverages its coal feedstock production methods to make other chemicals and plastics. Eastman's coatings, adhesives, specialty polymers, and inks businesses generate solid operating margins. Along with the fiber segment, these businesses provide a relatively stable earnings base to offset swings in other areas. As with other chemical companies, Eastman's business model is subject to a high degree of operating leverage.