ARKAY Arkema (PK)

We have retained our Neutral recommendation on Eastman Chemical (EMN) following our assessment of its fourth-quarter 2012 results. While the company is poised to benefit from Solutia acquisition and capacity additions, a weak European market remains as overhang.

Why Retained?

Eastman Chemical slipped to a loss in the fourth quarter hurt by losses related to pension benefit and other charges. Earnings, as adjusted, matched the Zacks Consensus Estimate. Revenues rose at a double-digit clip riding on the contributions of Solutia acquisition, but missed the Zacks Consensus Estimate.

Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses remains its strength. It also benefits from business restructuring and cost-cutting measures.

The acquisition of Solutia represents a major step in Eastman Chemical’s strategy to boost its foothold in the emerging markets, especially in Asia Pacific. Factoring in the synergies of Solutia acquisition, the company raised its adjusted earnings forecast for 2013 to a band of $6.30 to $6.40 a share from its earlier view of $6.25. Annual cost synergies are expected to exceed $100 million in 2013.

Eastman Chemical should also benefit from increased capacity additions. The company is also making progress in its growth initiatives through its joint venture in China for a 30,000-ton acetate tow manufacturing facility, which is expected to come online in mid-2013.

However, the company remains exposed to weak pricing across specific markets. Lower pricing affected the results across a number of reporting segments in the fourth quarter. Moreover, uncertainty regarding the timing of a recovery in Europe also remains a concern.

Eastman Chemical currently holds a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other companies in the chemical industry worth considering are Arkema S.A. (ARKAY), BASF SE (BASFY) and Air Products (APD). While Arkema retains a Zacks Rank #1 (Strong Buy), both BASF and Air Products hold a Zacks Rank #2 (Buy).

 
AIR PRODS & CHE (APD): Free Stock Analysis Report
 
(ARKAY): ETF Research Reports
 
BASF SE (BASFY): Free Stock Analysis Report
 
EASTMAN CHEM CO (EMN): Free Stock Analysis Report
 
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