Innovative Projects And Operational Efficiencies Signal Bright Future In Challenging Market

Key Takeaways

• Economic recovery and strategic innovations in stable and discretionary markets are expected to drive revenue growth and enhance earnings.
  
• Infrastructure projects and cost optimizations, including methanolysis and decarbonization, aim to improve EBITDA, revenue, and net margins.
  
• High inflation, rising energy costs, and delays in key projects hinder Eastman Chemical's revenue growth and short-term earnings, with uncertain demand in discretionary markets.

Catalysts

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

• Eastman Chemical is poised to benefit from an economic recovery, with expected volume growth in both stable markets (such as personal care and aviation) and discretionary markets (such as auto and housing), which could drive a substantial improvement in revenue.
  
• The Kingsport methanolysis facility is anticipated to provide significant EBITDA improvement in 2025 through reduced costs and increased revenue, enhancing overall earnings growth.
  
• Cost structure improvements, including optimization of operations and decarbonization efforts, are expected to exceed normal productivity levels and contribute positively to net margins.
  
• The upcoming Texas methanolysis project, supported by DOE funding and tax incentives, aims to leverage operational efficiencies and diversify product offerings, potentially bolstering revenue and profit margins.
  
• Continued innovation and growth in products like Aventa for food packaging and automotive interlayers are set to drive demand and enhance revenue, even in challenging markets.

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 14.5x on those 2027 earnings, up from 13.3x today. This future PE is lower than the current PE for the US Chemicals industry at 22.6x.
• 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 terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Eastman Chemical Future Earnings Per Share Growth

Risks

• The macroeconomic environment is uncertain with high inflation, interest rates, and a manufacturing recession since mid-2022, impacting revenue, particularly in the discretionary markets.
  
• The rebalancing of customer inventories is completed, but a significant portion of Eastman’s revenue still relies on discretionary markets like automotive and housing, which have not shown strong demand recovery, posing a risk to revenue growth.
  
• Eastman faces rising energy costs, particularly natural gas, which could act as a headwind to net margins if input cost increases are not quickly offset by pricing.
  
• The methanolysis plant start-up has faced delays and operational cost issues, leading to challenges in achieving projected revenue and EBITDA contributions, which could impact short-term earnings growth.
  
• The French methanolysis project is on hold due to a lack of specific customer contracts driven by EU policy changes, highlighting execution risks and potential impacts on future earnings if projects are delayed further.

Valuation

• The analysts have a consensus price target of $116.0 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 14.5x, assuming you use a discount rate of 7.4%.
• Given the current share price of $101.33, the analyst's price target of $116.0 is 12.6% 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.