EUR 850.00 For Business Accounts Only

Morningstar | Trimming Our Eastman FVE to $94 on Lower Near-Term Profit Growth

Eastman Chemical reported mixed third-quarter results as growth in the advanced materials segment was more than offset by lower profits in the other three segments, resulting in a 2% year-on-year decline in EBIT to $451 million. Although management maintained 2018 guidance for adjusted earnings per share to grow 10%-14%, it noted that Eastman would probably come in closer to the bottom of the range. We had expected Eastman's 2018 adjusted EPS growth to be a little over 10%, but we have trimmed our outlook in the fibers and additives and functional products segments and now expect adjusted EPS growth of 10%. As a result of our outlook for slower near-term growth, our fair value estimate falls to $94 per share from $95 for narrow-moat Eastman.

In the advanced materials segment, profits grew 3.5% year on year to $147 million, driven by higher volume and a favorable mix shift toward higher-priced specialty products that include heads-up display automotive window films. As heads-up displays are installed in a greater proportion of vehicles, we continue to expect segment profit growth. Additionally, Eastman's automotive window interlayer films are used in electric vehicles to make windows energy-efficient and extend vehicle range. As we forecast electric vehicles to grow from 1% of global vehicle sales in 2017 to 15% in 2028, Eastman is well positioned to benefit from this growth.

In the additives and functional products segment, profits fell 2% year on year to $182 million despite higher volume; this was due to higher raw materials costs as Eastman was unable to fully pass along cost increases. However, tire resin volume continued to grow. This is consistent with our long-term view that the additives and functional products segment will benefit from stricter tire regulations require low-rolling resistance features, which require additional resins.

Fibers segment profits fell 14% year on year due to lower acetate tow prices as China stopped buying U.S.-based tow because of the trade dispute with the United States. As Eastman converts acetate tow capacity to produce textiles, the segment should be less affected by the Chinese acetate tow market. However, we continue to forecast global cigarette sales to decline, and as such, acetate tow sales should also decline.

For more on our electric vehicle outlook, please see our Sept. 24 Observer, "Electric Vehicle Sales in China and Europe Will Leave U.S. in the Dust, Driving Above-Consensus Global Adoption Rates."