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Will This Fiery Stock Sizzle in 2013?

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some stocks don’t even pause to catch a breath. Look at Eastman Chemical’s (NYSE: EMN) wild ride in 2012 – I have lost count of the new highs it created this year. And there’s no stopping it -- the stock hit $65.07 last week -- an all-time high for Eastman.

Many are sulking over the missed opportunity, and the question that’s troubling them is: Will Eastman do an encore in 2013? Chances are high if the company can exploit the huge opportunity in hand to the max.

Well deserved!

Eastman stands out among peers, and it’s not just stock gains I am talking about. The company's top line growth in the past twelve months surpassed that of peers, and its gross and net margins are among the best in the industry. Take a look at the table below:

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Revenue growth %</strong></p> </td> <td> <p><strong>Gross Profit Margin %</strong></p> </td> <td> <p><strong>Net Profit Margin %</strong></p> </td> <td> <p><strong>Debt-to-Equity %</strong></p> </td> </tr> <tr> <td> <p>Eastman Chemical</p> </td> <td> <p>22.9</p> </td> <td> <p>27.2</p> </td> <td> <p>7.7</p> </td> <td> <p>166</p> </td> </tr> <tr> <td> <p><strong>DuPont</strong> <span class="ticker" data-id="203289">(NYSE: <a href="http://caps.fool.com/Ticker/DD.aspx">DD</a>)</span></p> </td> <td> <p>20.5</p> </td> <td> <p>32.4</p> </td> <td> <p>7.9</p> </td> <td> <p>145</p> </td> </tr> <tr> <td> <p><strong>Dow Chemical</strong> <span class="ticker" data-id="203324">(NYSE: <a href="http://caps.fool.com/Ticker/DOW.aspx">DOW</a>)</span></p> </td> <td> <p>11.8</p> </td> <td> <p>19.2</p> </td> <td> <p>3.4</p> </td> <td> <p>103</p> </td> </tr> <tr> <td> <p><strong>Celanese</strong> <span class="ticker" data-id="207021">(NYSE: <a href="http://caps.fool.com/Ticker/CE.aspx">CE</a>)</span></p> </td> <td> <p>14.3</p> </td> <td> <p>22.4</p> </td> <td> <p>9.3</p> </td> <td> <p>156</p> </td> </tr> <tr> <td> <p><strong>Huntsman</strong> <span class="ticker" data-id="207930">(NYSE: <a href="http://caps.fool.com/Ticker/HUN.aspx">HUN</a>)</span></p> </td> <td> <p>21.3</p> </td> <td> <p>21.8</p> </td> <td> <p>4.5</p> </td> <td> <p>176</p> </td> </tr> </tbody> </table>

(Trailing Twelve Month figures)

While Eastman’s revenue grew at the fastest pace during the past year, only DuPont can boast of a healthier gross margin. But it has more to do with DuPont’s agriculture business than chemicals (the company derives more than a third of its revenue from agriculture). Dow Chemical had a tough time as it battled dwindling sales. Weak economic conditions, particularly in Europe, even compelled Dow to shut down facilities and cut jobs earlier in the year which pressured margins further by way of write-down costs. Restructuring kept Huntsman busy as well throughout 2012; and as a result dented its margins. Celanese managed good gross and net margins, thanks to a tight grip over costs.

Promising returns

So Eastman’s rise in 2012 seems justified. But now that the stock has risen a whopping 61% year-to-date, it isn’t cheap anymore. Peers, except Dow Chemical, trade at lower earnings multiples and thus appear more attractive.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Trailing P/E</strong></p> </td> <td> <p><strong>Forward P/E</strong></p> </td> <td> <p><strong>Return on Equity (TTM)</strong></p> </td> </tr> <tr> <td> <p>Eastman Chemical</p> </td> <td> <p>16.9</p> </td> <td> <p>10.3</p> </td> <td> <p>22.5</p> </td> </tr> <tr> <td> <p>DuPont</p> </td> <td> <p>13.6</p> </td> <td> <p>11.9</p> </td> <td> <p>27.5</p> </td> </tr> <tr> <td> <p>Dow Chemical</p> </td> <td> <p>24</p> </td> <td> <p>12.9</p> </td> <td> <p>7.7</p> </td> </tr> <tr> <td> <p>Celanese</p> </td> <td> <p>11.4</p> </td> <td> <p>9.9</p> </td> <td> <p>36.1</p> </td> </tr> <tr> <td> <p>Huntsman</p> </td> <td> <p>7.7</p> </td> <td> <p>7.9</p> </td> <td> <p>24.4</p> </td> </tr> </tbody> </table>

(Source: Yahoo! Finance)

Yet, the dip in Eastman’s forward P/E indicates how earnings are expected to grow in the future. That’s natural, because the growth potential that Eastman has bagged in the form of Solutia is immense, which is also why I am not reading much into its debt-equity ratio which shot up as a result of additional $2.4 billion debt acquired during Solutia’s takeover. What’s more, Eastman plans to de-leverage swiftly by repaying half of the debt acquired within a year.

Solutia could be indeed a game-changer for Eastman in the emerging markets, particularly the Asia-Pacific region where Solutia had a strong hold. In the third quarter, Eastman’s sales contribution from the region climbed four percentage points to 28% compared to same quarter last year, and sales grew at a 45% clip. The acquisition thus gives Eastman a great head start to capture a high-potential market before rivals snatch the game away. It also gives Eastman a fantastic avenue to shift focus from the struggling European region and make up for lost sales.

Eastman’s third quarter was the first such to include numbers from Solutia, and it certainly gave out positive vibes. Earlier during the year, Eastman had set out full-year earnings per share guidance of $5, including Solutia. But with the third quarter turning out to be sweet, Eastman raised its outlook to a range of $5.30 to $5.40 per share for 2012. That would mean record earnings for the company.

What’s next?

Coming back to the question, can we expect Eastman’s shares to continue their run up in 2013? Well, going by analysts’ estimates, we may. For around 18% growth this year, the stock shot up over 60%. Analysts are pegging the company to grow at around 17.3% in 2013.

On its recent Investor Day, Eastman told stakeholders what they wanted to hear – on track to meet full-year estimate and ambitious projections for the years to come. The company expects to earn $6.25 per share next year, and is looking at an EPS of $8 by the end of 2015. Sure, it’s a crystal ball guide, but enough to keep Eastman investors on their toes, and to keep the stock on your watchlist. Click here to add Eastman Chemical to your stock watchlist.

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Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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