Aviation And Personal Care Innovation Propel Dynamic Growth Amid Economic Challenges

Key Takeaways

• Innovation in core markets and product optimization aim to boost margins and revenue, with stable segments like personal care leading growth.
  
• Recovery in discretionary markets and strategic facility enhancements could significantly improve earnings through increased revenue and efficiency.
  
• High inflation, manufacturing recession, and energy costs pressure Eastman's revenue and earnings, while innovation challenges and market uncertainties impact product adoption and inventory management.

Catalysts

Operates as a specialty materials company in the United States, China, and internationally.

• Eastman Chemical anticipates above-market growth in 2025 driven by innovation, particularly in stable markets such as personal care and aviation, which comprise about 60% of their revenue. This is expected to accelerate volume growth and potentially increase revenue.
  
• A recovery in discretionary markets like auto, housing, and consumer durables, which currently constitute about 40% of revenues, could provide significant upside. Lower interest rates may improve affordability, aiding a return to normal demand levels and impacting revenue growth positively.
  
• The Kingsport methanolysis facility is set to contribute to substantial EBITDA improvement next year through both increased revenues and cost tailwinds, potentially boosting earnings.
  
• Eastman is focused on optimizing operations and product complexity to maximize gross margin, alongside driving cost efficiencies above inflation, potentially improving net margins and earnings.
  
• Eastman plans to leverage its innovation capabilities with products like Aventa in food applications and expanding products in semiconductors and coatings, enhancing revenue through new market growth opportunities.

Eastman Chemical Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eastman Chemical's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.5% today to 11.5% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $9.87) by about November 2027, up from $885.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2027 earnings, up from 13.2x today. This future PE is lower than the current PE for the US Chemicals industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Eastman Chemical Future Earnings Per Share Growth

Risks

• Continued high inflation and interest rates, alongside a manufacturing recession beginning in summer 2022, have impacted end market demand, particularly in discretionary markets, affecting revenue and earnings.
  
• The company is facing challenges with the slower than expected launch of new products, and while innovation is seen as a growth driver, economic weakness may shift focus to cost management over product innovation, potentially impacting short-term revenue growth.
  
• Higher natural gas prices are anticipated as a headwind, causing potential increases in energy costs that could negatively influence net margins and earnings.
  
• Eastman’s Aventa food packaging and other innovative products in development may face uncertain adoption rates, and assumptions of market acceptance could lead to mismatched inventory if demand doesn’t meet expectations, impacting revenue and earnings.
  
• In the fibers business and the broader market, Eastman notes the risk of inventory management by customers, leading to potential reductions in volume demand, while recent capacity increases in China could also impact contract terms, affecting revenue stability in the near future.

Valuation

• The analysts have a consensus price target of $115.53 for Eastman Chemical based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $130.0, and the most bearish reporting a price target of just $105.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.9 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $100.88, the analyst's price target of $115.53 is 12.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.