This Stock’s on Fire - Don’t Miss It!
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you have been following my articles, you wouldn’t have missed this stock’s run up. When Eastman Chemical (NYSE: EMN) hit a 52-week high in August, I felt like it was just the beginning. Since then, Eastman’s shares are up more than 10%, making gains on solid numbers and raising full-year outlook.
So what’s fueling the optimism; and more importantly, will it be sustained? I’ve got some answers for you.
Quick, give me the numbers!
Eastman’s revenue climbed an impressive 25% from the same quarter a year ago to $2.3 billion. This was mainly thanks to Solutia, the chemical company Eastman acquired recently that was included in its earnings report for the first time this past quarter.
The Solutia acquisition and other restructuring moves, however, took a toll on Eastman’s bottom line, pulling down its earnings per share by almost 19% year over year. But if we remove such additional costs from the third quarters of both years, EPS was at record high.
All eyes were fixed on the third quarter, as it was the first to be reported after completion of the Solutia acquisition; and the numbers certainly give out positive vibes. Eastman’s confidence reflected through its improved full-year earnings guidance, and boy, it all looks good to me!
The Solutia to all problems
Eastman’s emphasis on emerging markets became clear when it acquired a Brazil-based plasticizer company late last year and struck a joint venture with a Chinese company to set up a new plant. When it planned to take over Solutia, it was coined as Eastman’s biggest move to expand geographically.
Solutia could take Eastman places. Eastman’s primary aim behind the huge $4.8 billion deal was to deepen its foothold in markets that are considered to be the fastest-growing in the world. In particular focus is the Asia-Pacific region, which Solutia has a strong presence in. It derived 30% of revenue from the region last year, as opposed to 24% from the U.S.; and China was its biggest standalone market, contributing 14% to total 2011 sales. Considering how keenly peers are eyeing these markets for growth, Eastman’s strategies make sense.
Boarding the flight with peers
Both of Dow Chemical’s (NYSE: DOW) key projects unveiled last year revolve around developing markets. One was the joint venture it announced was with Saudi Aramco to set up the world’s largest petrochemical facility -- 45% of production from the facility will be pumped into the Asia-Pacific region. The other was a joint venture was with Mitsui to produce ethanol-based polymers in Brazil by setting up the world’s largest dedicated plant. Emerging geographies account for 32% of Dow’s sales, with Asia-Pacific contributing nearly 18% and the rest coming from Latin America. Dow wants to up the ante to 35% this year.
Likewise, developing markets are where DuPont (NYSE: DD) is betting it finds growth – these markets accounted for 34% of the company’s total sales last year, and DuPont wants to take it up to 40% by 2015. The Asia-Pacific region emerged as its primary market, accounting for 35% of total sales in 2011. From innovation and research and development centers to new plants – the chemical major is doing it all in this market.
Another passenger on the same flight is Exxon Mobil (NYSE: XOM), which is one of Eastman’s main competitors through its chemicals business. Exxon derives more than 30% of its chemical sales from the Asia-Pacific region, and its largest petrochemical facility is in Singapore too (which is undergoing further expansion). The oil major expects demand for commodity chemicals to grow by more than 50% by 2020, and feels the Asia-Pacific region will account for a whopping two-thirds of the total growth. It's not surprising that it is directing investments into the region – its latest project is setting up a new plant with annual capacity of 400,000 tons of specialty products through its joint venture with a Saudi Arabian company, to cater primarily to the Asian market.
Given these facts, Solutia could indeed change Eastman’s fortunes. Its effects were visible in this past quarter – Eastman’s sales from the Asia-Pacific region grew a whopping 45%, and the region contributed 28% to total sales, compared to 24% in the same period a year ago.
Eastman’s strategy to emphasize on markets outside the U.S. could particularly help it tide over challenges like the ones poised by the European crisis. Europe proved to be a major headwind for every chemical company. Sales in Celanese’s (NYSE: CE) third quarter slumped 11% as demand in Europe fell, while DuPont reported a 9% dip in third-quarter sales as weakness in the market hit hard. Sluggish demand from Europe also put a wrench in Exxon Mobil’s chemical business earnings in the last quarter – though earnings rose 10% year over year to $1.45 billion, nearly $100 million was lost due to Europe.
As each of Eastman’s divisions derives more than 20% sales from the European market, its third-quarter revenue figures could have been really bad had it not been for the higher sales from the developing regions.
Time to make records
Volumes were a key revenue driver in Eastman’s past quarter, while prices largely remained soft. But even that could improve as Eastman has announced fresh price hikes for its products, effective November. Celanese made similar announcements, indicating an industry-wide trend to pass on costs to consumers.
Riding high on the addition of Solutia, Eastman expects its full-year earnings to be in the range of $5.30 to $5.40 per share. Now here’s what you should make note of: even at the lower end of guidance, it would mean a 15% improvement from last year’s reported EPS, and that would be a record for the company.
So is Eastman still a good bet at current prices? Well, the stock is currently trading at under 10 times forward earnings, which when tallied with P/E of around 16 suggests good potential for further upside.
Eastman will give out more information about how it plans to integrate Solutia and balance it with other growth plans on its Investors Day. I promise to bring you any valuable updates. Just stay tuned by adding Eastman to your stock watchlist. Click here to do it.
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Nehams has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.