EPSTEIN
page 3 / 655 . OCR, unverified
hikes till December) the markets continue to price an overly aggressive BanRep for 2015. We continue estimating around
50bp of premium priced for 2015, which should be supportive for short end receivers (IBR 6M1Y captures the bulk of the
premium, displaying around 5bp/month of carry) and the front end of TES16. Also see Data Flash — Colombia.
Drausio Giacomelli
Robert Burgess
Hongtao Jian
Sameer Goel
Tazia Smith
Director I Key Client Partners - US
DR Saturitins Int
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DB Securities Inc
Deutsche Asset & Wealth Management
345 Park Avenue, 10154-0004 New York, NY, USA
Tel. +1(212)454-2889
Fax +1(646)257-3131
Moaile
Email
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Deutsche Bank
Markets Research
Elating
Buy
North America
United States
Industrials
Chemicals / Specialty
na pony
Eastman Chemical
EMN N
PAN UN
NYS
EMN
Share Price Decline Unwarranted
Concerts; overdone. Valuation compelling at 1O
1EE vs Do:: at 14 tihi Bav
Eastman shares fell 8% despite a solid 02 beat and the reaffirming of '14
guidance as investors focused on i) new '15 guidance of $7.50-$8.00 (vs $8
previously) and ii) a lowering of '14 Fibers (largest and highest margin
segment) EBIT guidance by 6%. We believe investor concerns are overdone as
i) Eastman has been backing away from the $8 target for months and, as
evidenced by consensus of $7.77, was not viewed as achievable either and ii)
Fibers is under-earning in '14 due to destocking, lower demand and reduced
operating rates. With valuation a compelling 10.6x '15 EPS vs 14.8x for Dow
and Q2 evidencing a more predictable and resilient earnings generator, Buy.
O2 bears by $O U. " 14 guidance of 56.70-37 .00 rear firmed (cons. 36 931
Eastman reported Q2 EPS of $1.92, up 7%, and $0.08 or 4% above consensus.
An unplanned outage at Eastman's Kingsport plant reduced sales by $10MM
(in Specialty Fluids & Intermediates {SFI)), EBIT by S10MM (evenly divided
between Advanced Mat'ls, Fibers and SFI) and EPS by $0.05. Prior to the
outage, consensus was $1.88. A lower than expected tax rate added $0.01.
The upside was driven by stronger than expected results in Adhesives &
Plasticizers (AP) and SFI. Sales rose 1% on flat volumes and price while FX
added 1°!.. EBIT fell 3% to $441MM while margins compressed 70bps YoY
(+130 000) to 17.9% on higher propane costs. Eastman repurchased $100MM
of stock in 02 and has $640MM left under its $16 authorization. Eastman
reaffirmed its full year guidance range of $6.70-$7.00, up 4-9% (cons: $6.93).
Loyieting 145 EPS by 0.05 to 36.90. Lowe' ins '155 EPS by SO OS to $y.70
Notwithstanding a solid Q2 release, Eastman shares fell 8% due to concerns
over lowered '15 EPS and '14 Fibers guidance. Another driver, in our view, was
the wide $0.30 guidance range for 2H14 as it implies a high degree of volatility
in Eastman's business. A slight narrowing of the range to 56.75-$6.95, in our
view, would have alleviated this concern. For 2H14, we expect slightly lower
EPS for Eastman due to destocking in Fibers, a slowdown in heat transfer
fluids (China) and a planned outage at the company's largest ethylene cracker
in Longview, TX ($20MM, or $0.10 impact in Q4). Looking ahead to '15, we
believe Fiber earnings will recover modestly post destocking and lower plant
operating rates in '14. While we concur with Eastman's view that Fiber
earnings are plateauing, we believe EBIT will be higher in '15 at -$500MM vs
the depressed level of $480MM in '14. And with EBITDA of $550MM and
capex of just $50MM. Fibers should be strong source of cash to fund growth
(M&A, buybacks). For all of '15, we believe Eastman has a number of tailwinds
that should drive earnings well above $7.50 including: normalized operations