Opinions
Mohsin Bashir
Eastman Chemical
EMN-N
COMMENT
Aug 31, 2016
Stock price when the opinion was issued
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(A Top Pick May 8/17. Up 25%.) Still has lots of upside potential, but is coming hard up against technical resistance, so is watching to see if it will break out. There is enough potential that it should be able to do it. Needs another $2 or $3 on the upside, and then we get a clear technical break out, and then it would be okay to Buy. Right now, he would be cautious.
Just delivered a beat in their quarterly report last week, but the stock actually got hit. Days later, Bank of America upgraded EMN and the stock rebounded. He recommended this in June because there's a long-term shortage of the chemicals they supply. Also, EMN has developed a technology that makes recycled plastic a lot more lucrative. EMN raised its full-year forecast by a strong 50 cents. It trades at 13x earnings and should be $5-6 higher.
A very large, highly diversified chemical business that manufactures a series of different plastics, polymers, olefins as well as synthetic fibers. One of the biggest challenges has been compression of crack spreads that have been tightening, so any of the plastics they are making are getting more expensive and margins are getting squeezed. Another challenge is the reduced demand for acetate tow, of which they are the biggest manufacturer, which are used primarily for filters for cigarettes and ink reservoirs for pens. The amount of leverage on the balance sheet is pretty high, at about 3.2 to 4 times. However, valuation is pretty compelling. Price to cash flow is at about 6X and earnings at about 9.6X. If you can stomach the volatility it is probably going to be a really good business to hold. They are committed to dividend growth. Very well diversified.