Morningstar | Maintaining $94 FVE for Eastman With Few Changes to Our Long-Term Outlook; Shares Undervalued
Eastman reported a year-on-year operating profit decline in its fourth-quarter results. The company faced temporary margin compression due to higher oil-based raw materials costs and falling prices for many of its downstream chemicals. Regardless, we continue to view Eastman as well positioned for long-term growth stemming from its patented specialty chemical portfolio. Although we've slightly reduced our 2019 forecast, this is offset by the effects of the time value of money. Having updated our model, we maintain our $94 fair value estimate. Our narrow moat rating is also unchanged.Many of Eastman's downstream chemicals are made using basic chemicals that are priced off oil, as marginal cost producers use oil-based naphtha as an input. As oil prices fell from over $80 per barrel at the beginning of the fourth quarter of 2018 to the mid-$50s by the end of the year, Eastman had to sell its products at lower prices. However, the company concurrently had to digest higher-cost inventory purchased in the third quarter amid higher oil prices, which compressed margins. Of course, the reverse effect takes place when oil prices rise. Either way, the impact is only temporary and has no bearing on our long-term outlook.
In the advanced materials segment, operating earnings fell 14% year on year to $71 million during the fourth quarter due primarily to a decline in specialty plastics sales. Specialty plastics make up roughly half of total segment sales and are particularly exposed to the U.S.-China trade dispute. Many of Eastman's customers are Chinese manufacturers that export products to the United States and European Union. The decline was partially offset by growth in automotive window interlayers, which include Saflex heads-up displays. This is consistent with our long-term outlook that heads-up displays will grow faster than the general auto market as these products will be used in a greater proportion of vehicles.
Eastman Chemical is a global advanced materials and specialty additives company. The company's segments are: Additives and Functional Products, which manufactures chemicals for products in the transportation, consumables, building and construction, and other markets; Advanced Materials, which produces and markets polymers, films, and plastics in transportation, consumables, building and construction, durable goods, and health and wellness markets; Chemical Intermediates, which utilizes integration from the cellulose and acetyl, olefins, and alkylamines streams; and Fibers, which manufactures and sells Estron? acetate tow and Estrobond? triacetin plasticizers for use in filtration media.
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