Eastman Chemical Earnings: Customer Inventory Destocking Continues to Weigh on Profits

Eastman’s EMN third quarter showed mixed results that changed our near-term outlook but confirm our long-term view. Having updated our model for lower near-term results, we trimmed our Eastman fair value estimate to $125 per share from $130. Our narrow moat rating is unchanged.

Companywide adjusted EBIT was down 23% versus the prior-year quarter as volume declines from customer inventory destocking weighed on profits, as Eastman ran its plants at a lower capacity utilization rate to sell excess inventory. While we expect demand will largely stabilize by the end of the year, we now expect a fourth-quarter year-on-year profit decline with a more modest recovery in 2024 versus our prior forecast.

However, despite companywide volume declines of 11% year on year, prices largely held up in Eastman’s specialty segments. This confirms our view that Eastman’s products are differentiated enough to hold pricing during a downturn, which underpins the thesis behind our long-term forecast for profit margins in the advanced materials and additives and functional products segments to recover to 20% by the end of our five-year explicit forecast.

Eastman shares were up over 2% in premarket trading at the time of writing as management guided to profit growth in 2024. However, the stock trades in 5-star territory at more than 40% below our updated fair value estimate. Recovering profit margins and long-term profit growth is one of the largest drivers of our view that Eastman shares are materially undervalued.

Shares even trade below our downside scenario, which produces a fair value estimate of $75 per share. In our downside scenario, we assume little long-term revenue growth and profit margins below Eastman’s historical 10-year average. Accordingly, we see a strong margin of safety at current prices.