Eastman Chemical Earnings: Lower Volume Will Weigh on 2023 Profits, but Long-Term Growth Intact

After updating our model to incorporate Eastman Chemical’s EMN second-quarter results, we maintain our $130 fair value estimate and narrow moat rating.

Eastman’s stock was down July 28 as management cut its full-year guidance due to lower volume. We view the shares as undervalued, trading in 4-star territory and at more than a 30% discount to our fair value estimate.

We had expected Eastman’s results would come in below guidance. However, we have reduced our 2023 outlook further to account for lower volume and reduced capacity utilization, which will weigh on profits as the company is reducing production to get rid of excess inventory. We had expected that a slowdown would extend into 2024, weighing on both years’ profits. Now we have updated our forecast for a lower 2023 followed by a better 2024; we think the lower customer demand environment will remain in place during the second half of the year, but conditions will begin to improve in 2024.

In the advanced materials business, segment profits were down roughly 37% year over year as a 15% volume decline led to lower capacity utilization and weighed on profits. The volume decline was driven by the consumer durables and building and construction end markets, which are more cyclical and seeing a slowdown. Eastman noted a bright spot from electric vehicles, where it sells more than 3 times the content per vehicle for its window interlayers and films than in an internal combustion engine vehicle. As the cyclical businesses recover, we expect long-term growth will be driven by growing EV sales, which we forecast will account for 40% of new autos sold by 2030, up from roughly 10% in 2022.