Tariffs Will Constrain Consumer Durables But DOE Funding Will Help

Key Takeaways

• Eastman Chemical's growth is hindered by trade tensions and tariffs, particularly affecting revenue projections and new product launches.
  
• Continued tariff impacts could damage Eastman's operations through increased costs and declining demand, threatening future earnings and market stability.
  
• Operational efficiency and strategic initiatives in sustainable production and circular economy might enhance Eastman Chemical's earnings and long-term growth despite external tensions.

Catalysts

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

• Eastman Chemical's revenue projections have been lowered due to ongoing trade tensions and the implementation of tariffs, particularly between the U.S. and China, which have raised questions about the stability of the consumer durable market. This instability is expected to dampen revenue growth as the ability to launch new products is constrained by these tariffs and ongoing economic tensions.
  
• The company's fibers business is facing dual pressures from persistent destocking and tariff impacts on products sold to China. While current market conditions suggest modest growth rates of 1% to 2% in traditional markets, these challenges are leading to volume declines, which will likely impact revenue and earnings negatively in the near term.
  
• The continuation of tariffs could severely impact Eastman's operations by increasing costs and reducing demand, particularly as customers are hesitant to pay substantial duty rates. The projected $30 million negative impact from tariffs in Q2 highlights ongoing risks to earnings, which could worsen if trade tensions are not resolved.
  
• Eastman Chemical's Advanced Materials and Additives & Functional Products segments face exposure to trade dynamics, with potential volume declines as customers reduce inventory levels or shift sourcing to other regions. The uncertainty surrounding these tariffs complicates revenue and margin forecasts, as some segments may not recover swiftly if tariffs remain in place.
  
• Guidance withdrawal for annual earnings due to uncertainty in tariff impacts underscores the risk to future financial performance, with cash flow projections remaining more reliably forecasted. This implies potential downside pressures on earnings if unfavorable trade conditions persist, further impacting shareholder value.

Eastman Chemical Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Eastman Chemical compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Eastman Chemical's revenue will decrease by 0.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.8% today to 10.1% in 3 years time.
• The bearish analysts expect earnings to reach $925.0 million (and earnings per share of $8.06) by about May 2028, up from $922.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from 9.8x today. This future PE is lower than the current PE for the US Chemicals industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 1.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Eastman Chemical Future Earnings Per Share Growth

Risks

• Eastman Chemical is running its methanolysis facility at high rates with an 85 percent yield, suggesting operational efficiency could positively impact production volumes and earnings.
  
• The company has a cost program that is on track to achieve 50 million dollars of EBITDA from manufacturing efficiencies, indicating that improved margins may support earnings.
  
• Progress in converting Tritan lines to PET production to meet demand for high-quality recycled materials could bolster revenues as the market engages in sustainable practices.
  
• Despite geopolitical tensions and tariff uncertainties, customer engagement remains strong, with over 100 customers involved with durable side products, potentially stabilizing revenue streams.
  
• The DOE funding and investments in infrastructure for circular economy initiatives may foster long-term growth opportunities, enhancing revenue and earnings stability.

Valuation

• The assumed bearish price target for Eastman Chemical is $84.49, which represents one standard deviation below the consensus price target of $97.11. This valuation is based on what can be assumed as the expectations of Eastman Chemical's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $123.21, and the most bearish reporting a price target of just $76.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $9.2 billion, earnings will come to $925.0 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $77.92, the bearish analyst price target of $84.49 is 7.8% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.