Investments In Circular Economy And US Manufacturing Will Shape Future Success

Key Takeaways

• Growth in the circular economy and operational improvements at the methanolysis plant are expected to positively impact margins and earnings.
  
• Cost reductions and investment in U.S. manufacturing and reshoring could bolster revenue growth and improve operational efficiency.
  
• Rising operational costs, policy risks, and economic pressures could hinder earnings and growth, especially in key segments and sustainability initiatives.

Catalysts

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

• Eastman Chemical expects significant growth in its circular economy business, projecting a substantial $75 million to $100 million contribution with $50 million from Advanced Materials, driven by innovation and stable markets. This should impact revenue and earnings growth positively.
  
• The Kingsport methanolysis plant is improving operationally, achieving higher production levels and reduced operational spending, indicating strong operating leverage for 2025. This is likely to enhance net margins and earnings.
  
• Advanced Materials is expected to deliver strong performance due to innovation-driven growth, even in a flat market, while managing cost increases from natural gas prices and currency. This suggests potential improvements in net margins and earnings.
  
• Eastman is maximizing value through comprehensive cost reductions across its operations, including improving energy efficiency with rising natural gas prices. This focus on cost management is expected to bolster net margins.
  
• Investment in U.S. manufacturing and reshoring efforts, including projects like Eastman's Texas circular economy project with DOE funding support, could enhance revenue growth through infrastructure development and job creation initiatives.

Eastman Chemical Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eastman Chemical's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $10.06) by about March 2028, up from $905.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, up from 12.6x today. This future PE is lower than the current PE for the US Chemicals industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Eastman Chemical Future Earnings Per Share Growth

Risks

• Increasing natural gas prices and currency headwinds could offset volume and mix growth, impacting net margins in the Advanced Materials segment.
  
• The company faces rising costs associated with running the Kingsport methanolysis plant, which may challenge their ability to achieve desired operating leverage and affect earnings growth.
  
• Potential risks associated with changes in the U.S. administration's trade policies, such as tariffs and retaliatory measures, could affect the company's export revenue and supply chain stability.
  
• Economic conditions and inflation pressures could slow the pace of consumer brand commitments to recycled plastics, affecting revenue growth from the circular economy initiatives.
  
• Market conditions, such as high-cost capacity in the Fibers segment and destocking by customers, could lead to price volatility and affect net margins negatively.

Valuation

• The analysts have a consensus price target of $115.56 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 $128.0, and the most bearish reporting a price target of just $103.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.4 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $98.79, the analyst price target of $115.56 is 14.5% 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.