Eastman Chemical Company (EMN): This Chemical Business Is Relatively Cheap

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Eastman ChemicalSince September 2011, shares of Eastman Chemical Company (NYSE:EMN) have gained more than 110%, from $33.50 per share to more than $71 per share. The stock is in the portfolios of many investors, including Leon Cooperman, Ray Dalio and Jeremy Grantham. Recently, Barron’s featured Eastman Chemical Company (NYSE:EMN), believing that with the Solutia acquisition Eastman Chemical’s share price could experience a 35% rise to around $96 per share. Let’s take a closer look to determine whether or not we should invest in Eastman Chemical at its current price.

The chemical business legacy of George Eastman

Eastman Chemical was founded in 1920 with the sole purpose of producing chemicals for Eastman Kodak’s photographic business. Interestingly, George Eastman never knew that of his two connected businesses, one was going to be obsolete and the other would prosper over time.

Currently, Eastman Chemical Company (NYSE:EMN) has more than 40 manufacturing sites in 16 countries, operating in five main business segments: Additives and functional products, adhesives and plasticizers, advanced materials, fibers and specialty fluids and intermediates.

Most of its operating earnings, $385 million, or 29.6% of the total operating earnings, are generated form the fibers segment. The additives and functional products and the specialty fluids and intermediates both ranked second, with around $285 to $288 million in operating income, respectively, in 2012.

High leverage but low cost and long maturities

The $3.4 billion acquisition of Solutia at the beginning of 2012 seems to be a good strategic move, giving Eastman Chemical Company (NYSE:EMN) access to the fast-growing emerging markets, especially China. To fund the acquisition, Eastman Chemical had issued around $3.6 billion in debt, including a $1.2 billion term loan and $2.4 billion in senior unsecured notes. The company is expected to repay most of its loan this year.

In the beginning of 2012, Fitch commented that Eastman Chemica’s credit metrics would be strengthened thanks to the debt reduction and operating income growth. As of March, it had $3.1 billion in equity, $178 million in cash and as high as $4.8 billion in long-term debt. However, most of its borrowings came in at a low cost. Around $1 billion was in the 3% debentures due 2015, $893 million was the 3.6% notes due 2022 and $950 million was the credit facility borrowing.

In 2012, Eastman Chemical Company (NYSE:EMN) generated around $5.38 in EPS. Looking forward, its EPS could reach around $8.00 per share, including Solutia’s operating results. Moreover, after funding organic growth, its free cash flow was expected to be more than $2 billion in the period of the 2012 through 2015 period.

Eastman Chemical Company (NYSE:EMN) is trading at $71 per share with a total market cap of around $11 billion. The market values Eastman Chemical at only 7.2 times its forward EV/EBITDA. (EV/EBITDA represents Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization. It reflects the market value, adjusted by the cash and debt, in relation with the cash flow generating ability of the company.)

The cheapest among other large chemical companies

Compared to its chemical peers including E I Du Pont De Nemours And Co (NYSE:DD) and Ecolab Inc. (NYSE:ECL), Eastman Chemical is the cheapest valued among the three companies. Ecolab is trading at around $84 per share, with the total market cap of nearly $28.9 billion. The market values Ecolab at a much higher valuation at 11.9 times its forward EV/EBITDA.

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