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Krause Fund Research
Basic Materials | Fall 2015
Recommendation: HOLD
Analysts
Yichao Mao Poh Yee Lai
[email protected] [email protected]
Hao Lin Aun Xian Lim
[email protected] [email protected]
Company Overview
Eastman Chemical Company (NYSE: EMN) is a
specialty chemical company headquartered in
Kingsport, Tennessee with a global presence via
joint ventures and supplying products to customers
all over the world. EMN was incorporated in
Delaware on December 31 1993 independent from
Eastman Kodak which was established by George
Eastman in 1920.1 The company success is
contributed by the core values of quality, innovation
and teamwork. Due to its specialty commoditized
operations, EMN operates business to business. At
Eastman, safety, sustainability and innovation are the
key factors to creating quality products and by
partnering with North Carolina State University, the
Eastman Innovation Center collaborates expertise
with skills and knowledge to promote innovation
initiative with the goal to protect people and the
environment.
Stock Performance Highlights
52 week High $88.93
52 week Low $62.84
Beta Value 1.38
Average Daily Volume 1.34M
Share Highlights
Market Capitalization $10.19B
Shares Outstanding 148.61M
EPS $4.94
P/E Ratio 13.90
Dividend Yield 2.36%
Dividend Payout Ratio 33.48%
Eastman Chemical Company
(NYSE: EMN)
November 16, 2015
Current Price: $68.60
Target Price: $75-80
EMN able to compensate despite
some downfalls
Eastman is targeting emerging markets, building
facilities abroad and potentially increases its sales
revenue in the Asia region. Specialty Fluids and Intermediates segment (SFI)
has been the major contributor for revenues.
Ethylene and propylene prices drop result in an
estimate of 50% profit decline within Q3. With the
decrease in intermediary prices, we expect to see a
decrease of ~5% of total y/y sales within the
segment. Eastman has been aggressive with acquisitions
and we would expect them to hold onto future
acquisition until debt level lowers. Eastman is currently having a high-debt from
recent acquisition. They are in the process of paying
off debt which caused lesser profit margins. Constant dividend payouts indicates an effective
internal management and a steady long term growth
Company Performance Highlights
ROA 7.75%
ROE 18.80%
Profit Margin 7.75%
Financial Ratios
Current Ratio 1.77
Debt to Equity 184.88 Source: Yahoo Finance, November 13, 2015
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One Year Stock Performance
Source: Yahoo Finance, November 13, 2015
This report was commissioned to examine the rating
of the company, whether to buy, hold or sell.
Ultimately we have given Eastman Chemical a
HOLD rating as we saw a sharp decline growth in the
materials sector in the short run. However, an
increase of shareholder return within the time span of
12 month period has given us the confidence of
continuous growth in the long term. Based on past
years, Eastman has proven to shareholders of their
capability of paying dividends with the excessive
cash on hand. Despite the dividend payout, Eastman
successfully outpaced in growth most of its peer
competitors within the Materials-Chemicals
industry. The opportunities that Eastman will be
endless, and would likely to sustain fairly long-term
in this particular industry as most of its end-market
users are for transportation, and Building &
constructions, Wellness & Health. With that reason,
EMN being able to compensate the recent stock price
plummets with foreseeable long-term growth, we
recommend HOLD.
This is an outline of key variables that we believe are
important to the activities of the basic materials
sector. We have determine that these variables are
production price index (PPI), real gross domestic
product (GDP), oil and energy prices, government
regulations and policies, supply and demand and
interest rate.
Production Price Index (PPI)
Given that the heat has been increasing within the
FED for an increase with the Fed Fund Rates for this
coming December.2 We would assume that the
historical low inflation rate would have a slightly
upward tilt for FY16 to FY18 and approximately 2%
in the 10 years. Overall, EMN would be facing
headwinds of decreasing in purchasing power and
the margin spread when inflation takes place, but we
expect that the long term growth of the company
would outperform the benchmark by approximately
8% based on historical data and also recent strong y/y
earnings report.
Real Gross Domestic Product (GDP)
Real Gross Domestic Product (GDP) is a measure
that accounts for monetary changes between a
nation’s produced finished goods and services and
the value of the goods and services used up in
production. In year 2015, the real GDP growth for
the first quarter was 0.6% and it grew tremendously
to 3.6% in the second quarter. In the third quarter, the
real GDP increased at an annual rate of 1.5%.3
Source: Bureau of Economic Analysis
The graph indicates the quarter-to-quarter growth in
real GDP for the past four years to be increase with
only one quarter to decrease. After analyzing the past
data, we are predicting real GDP to grow between
1.5-3.5% per quarter in the short term for the next
five years. As for the long term rate, we are
predicting real GDP to grow annually at a rate near
3% since historical data suggested that the average
growth has never been higher than 3%. Since the
U.S. economy is not in a recession now, GDP figure
is not expected to jump up to a level of 6-8% range.
Oil and Energy Prices
Oil and energy price is one of the most important
drivers of the chemical industry because oil and its
derivatives are heavily used in production. Some
chemicals are produced through highly energy-
intense manufacturing process and have a strong link
Executive Summary
Economic Outlook
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to oil prices. So changes in oil price can have a direct
impact on cost structure of chemical industry. For
commodity chemicals, production costs are the main
cost driver to determine market price. The decline of
oil price can affect manufacturers’ production
economics as well as market price. Sudden dramatic
change of the oil prices can change individual
consumers’ views on their disposable incomes. If oil
prices keep staying low, investment in durables and
fixed assets will increase a lot, as well as the
spending on chemicals used to make the durables and
fixed assets.4
Source: MacroTrends
The graph indicated crude oil price decline since
mid-2014. As of November 13, 2015, the crude oil
price was $40.74. We predict in the short term within
the next 12 months that the crude oil price will be
between $40 and $50. In the long run within the next
three years, we predict that crude oil price to grow
until the range of $60 to $80. This oil shock have
significant impact in cost and margin of materials
sector producers. Companies should take advantage
of this attractive opportunity to grow in revenue and
profits.
Government Regulations and Policies Federal government regulations has significant
impact on the basic materials sector because
companies of this sector often uses hazardous
materials. Materials sector companies have large
amount of toxic waste and they require proper
disposal technique to prevent negative
environmental effect such as water pollution and air
pollution. Failure to comply would result in penalty
and possibly interrupting assembly line which will
cost the company to a substantial loss from being
shut down.
With regulations, companies are expected to absorb
cost and results in the shrinking of profit margin. We
predict there will be more regulations in regards to
this sector because of government effort to protect
human and environmental health.
Supply and demand
Supply and demand plays an important role in the
economy. This variable affects many factors from
stock price, productivity and profitability. If the
demand for materials goes down, many firms will
have a hard time surviving it. Developing market is
the drive of the future growth of the chemicals
industry.
We believe that supply and demand is highly
influence by natural and artificial resources.
Resources depletion is significant to a company
because companies need to be able to anticipate for
the lack of resources in the future to supply the
market demand. When inflation decrease along price
level then supply would increase when consumer can
increase purchasing power for consumer product that
are manufacture with derivative that are produced by
companies in the materials sector.
Interest Rate
Interest rates play an important role in stock price
and the allocation of debt and equity capital. With fed
fund rate being at a low of 0.25 % since 2009,
companies are more willing to take on debt because
it is cheaper to borrow money.5 With the low fed
fund rate, banks lend money at a lower interest rate.
High expenditure due to expensive resources and
high research and development costs are some of the
reason companies would take on debt.
Source: Trading Economics
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Material sector has underperformed and ranked at the
bottom 3rd in terms of YTD growth. Through
November 16 the S&P material index fell a total of
7.4% and EMN did worse by having YTD decrease
of 8.4%. We expect the materials sector to remain at
the bottom for the remaining quarter and possibly
through 2017 as consensus have a 0.2% decline in
2016 GDP estimates compared to 2015.
Source: Thumbcharts
Industry Overview
The Chemical industry is a sub-industry of Basic
Material sector. In the S&P Global Industry
Classification System (GICS), there are five
industries under the Basic Material sector, which are
chemicals, construction materials, containers
packaging, metals& mining, and paper& forest
products. As of June 5, 2015, the chemicals industry
comprises 69% of the basic material sector.
Source: S&P Capital IQ
Judged from the profitability perspective, the
chemical industry is the most profitable one since
year-end 2011 because it yields the highest net
income margin.
Source: S&P Capital IQ
Sub-Industry
There are total five sub-industries under the chemical
industry, which are commodity chemicals,
diversified chemicals, fertilizers& agricultural
chemicals, industrial gases and specialty chemicals.
Celanese Corporation falls under the Chemical-
major diversified industry. Some of the leading
chemical companies are also in this sub-industry, for
example, Dow Chemical, DuPont USA and Eastman
are all under the chemical-major diversified industry.
The following are some basic statistics about the
chemical-major diversified industry.
Market Capitalization 10,218B
P/E 14.0
P/B 11.0
Net Profit Margin 8.0%
Price to Free Cash Flow -490.8
ROE 20.9%
Total Debt/Equity 62.3
Dividend Yield 3.3% Source: Yahoo Finance
Recent Developments and Industry Trends6
1. Restructuring Business Model
Restructuring “go – to-market” approach is to
strategizing the competitiveness of the market at the
specific region/location. Strategy on manufacturing,
focused more on flexibility and customizable
products for the market needs.
2. Emerging Markets
Offshoring to a developing country gains typically
ranges from 6-10% more and a lower cost. Lower
cost based on developing markets, and have a greater
Capital Markets Outlook
Industry Analysis
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flexibility and agility to decision making. While
competition is increasing domestically. Most
Chemical industry companies, are avoiding “one size
fits all”, companies are investing in capabilities
which are tailored to the varied characteristics of the
specified market strategy on manufacturing. Instead
they are focusing more on flexibility and
customizable products.
3. Embracing digital transformation
Chemical companies use automation and
information technology like internet to increase
reliability, reduce costs, and create greater
operational efficiencies in production and supply
chain management. It’s helpful for customer
interface. Digital technology can integrate the
massive flows of data. Customer can learn product
easily with the digital technology.
Markets and Competition
Chemical industry manufactures a variety of product
that are used by regular household on a day-to-day
basis. As the economy grows each year the total
revenue of the global chemical industry grew as well.
In year 2009, there is a drop in total revenue due to
the recession. Raw materials and resources price and
availability has a huge impact to the growth of the
company and that is why sustainability is important
for the firm and the industry. After the recession,
total revenue increased again and the growth within
the immediate years following the recession is a lot
higher during the periods of normal growth. Within
a decade period, the total revenue grew almost 3.5
trillion U.S. dollars.
Source: Statista
As the year goes by, companies continuously grow
by conduct more research and development,
expanding sales market and increase in production
line. In the next two years, all industry is expected to
increase and then decrease to a steady state for two
years. Among the different industries, specialty
chemical is forecasted as the top performing
industry.
Source: Statista
Porter’s 5-Forces Analysis7
1. Threat of new entrant
Moderate; Industry leaders are large global firms
that have heavy capital due to the high cost of
research and development and human capital. Due
to globalization, it is not easy to compete with large
firms with strong presence. Government
regulations, policies and patents related to the
industry can easily become obstacle to new entrants.
2. Threat of substitute products or services
Weak; Chemicals are important for firms in this
industry because they are the inputs for the output.
Since they are chemicals, they generally have
specific composition and hard to be substitute by
alternative. If there is an alternative, they are usually
produced by the same industry players because of the
heavy research and development nature.
3. Bargaining power of buyers
Moderate; medium to large firms that manufacture
consumer products such as household cleaning
supplies have relatively strong buying power due to
the market players. Due to the nature of chemicals
being commoditized, buyer power increases due to
the undifferentiated product which is affected by
firm’s unique purity, composition and branding for
the quality. Another factor that affect the bargain
power of customers is the switching cost when better
deals are offered during the contractual period. If
firm decides to break a contract, there will be
additional cost incur and that affects the buyer
power.
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4. Bargaining power of suppliers
Moderate; as an industry dependent on raw
materials such as oil and natural gas, oil prices affects
the supplier power. When there is a drop in price,
supplier power is likely to decrease. Suppliers are
limited and supplies for many other industries but
because of the high capital and resources nature of
the industry, supplier power is strong. This applies to
other chemicals that are derived from natural
resources as inputs.
5. Intensity of competitive rivalry
Moderately strong; in the chemicals market, large
multinational corporations tend to be the market
leader and there are only a handful of them actively
operates. The manufacturing of chemical products
are commoditized which makes it undifferentiated
thus companies will offer competitive incentives in
contracts to increase rivalry. Due to the complexity
of the chemical manufacturing process, there are
high exit costs, high fixed cost and high storage cost.
High volume manufacturing helps firm to adapt to
high demand when necessary, therefore, rivalry is
strong.
Corporate Strategy
Eastman seeks to excel as a specialty chemical
company with consistent earnings growth and strong
cash flow by the sale of differentiated products into
diverse market across the globe. In creating value to
customers, Eastman meet their need through existing
and innovative products while leveraging the
products mix and advantaged cost positions. Growth
internally and externally via acquisitions and joint
venture is crucial for the company to improve
earnings.
Global Presence8
As Eastman recognized emerging markets outside
the United States, the company expanded operations
in 33 other countries in the different continents. As
of December 31, 2014, EMN operated via the 51
manufacturing facilities and the four manufacturing
joint ventures in over 15 countries. Each
manufacturing sites contributes to one or more
segments of the revenue stream according to the
supply of the raw materials. In the Asia region, the
manufacturing locations are either at least 50% joint
venture or lease under operating agreement. As
customer service become more important, Eastman
has technical service centers and customer service
centers outside of the United States assisting
customers despite the distance and time difference.
To achieve the presence outside the United States,
Eastman would participate in joint venture with other
companies in the different region. This helps with
Eastman’s sales without a high cost. In addition,
acquisitions are very common for Eastman in
venturing into familiar product manufacturing at a
low cost with existing resources.
Source: Eastman 2014 Annual Report
This graph shows the significant revenue growth in
those emerging markets outside the United States for
the past five years. Although the percentage of sales
revenue is decreasing for the United States, the
percentage of sales revenue outside of the United
States has become a very prominent part of the
company’s revenue.
Mergers and Acquisitions8
A major activity that influenced the finances of
Eastman is the acquisition of Taminco on December
5, 2014. It was acquired along $2.8 billion which
consist of $1.1 billion in debt repayment and $1.7
billion net of cash. This acquisition expanded the
AFP and SFI segment with Taminco’s specialty
amines and crop protection businesses.
In December 11, 2014, the Advanced Materials
segment was accounted along the business from
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United Statesand Canada
Company Analysis
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Commonwealth Laminating and Coating, Inc. The
purchase price was $438 million.
For the SFI segment, Eastman acquired BP plc’s
global aviation turbine engine oil business on June 2,
2014 for cash price of $283 million. In August,
Knowlton Technologies, LLC was purchase with a
total of $43 million cash price. This acquisition is
developing the microfiber technology platform.
At the end of period 2014, the net cash was $214
million. Cash flow from operating activities were
$1408 million, investing activities were -$4091 due
to active acquisitions and $2664 from financing
activities. To improve company growth, Eastman
decided to do acquisitions and remove competitors
instead of investing in research and development.
Business Segment & Product Lines8
At Eastman there are five main business segment
which includes additives and functional product,
adhesives and plasticizers, advanced materials, fibers
and specialty fluids and intermediaries. The product
from the different segments are used in many end-
user market
Source: Eastman Valuation Model
Additives & Functional Products Segment (AFP)
The main focus of AFP is manufacturing chemicals
for products in the coatings and tires industries in
transportation. In 2014, the sales revenue for this
segment was $1.8 billion, which allocate up to 19%
of Eastman Chemical's total sales. The growth of the
AFP segment has been increasing over the years
from 2012 to 2014, of $1.3 billion, $1.7 billion,
$1.8billion. The end product from AFP
consumables, tires, coatings and feed additives
which are typically driven by end users, by that we
could typically see the same pattern from of where
this segment will move towards with reference of the
general economic outlook.
We estimate the 2015E growth rate to be ~3.4%.
There is a potential growth in the AFP segment,
because in December 2014, the company acquired
Taminco specialty amines and crop protection. This
acquisition is expect to grow in attractive niche
markets. The company will also have a 40,000 metric
ton expansion of the Crystex insoluble sulfur rubber
additives in Kuantan, Malaysia, by mid-2017.
Adhesives & Plasticizers Segment (A&P)
The main focus of A&P is producing intermediate
chemicals for manufacturing customers, mainly sold
into consumables, building construction, health
wellness, and industrial chemical and processing,
and durable goods. A&P segment contributes 15% of
the total sales revenue, $1.4 billion. Since the
emerging country's economic growth tends to be
higher, the A&P segment main target markets are
emerging markets such as China, Europe, and Latin
America. Expanded Eastman 168 non-phthalate
plasticizers manufacturing in Texas City and a joint
project to build a 50,000 metric ton hydrocarbons
resin plant in Nanjing, China would give Eastman a
potential of huge growth initiatives.
We estimate the 2015E growth rate to be ~5.3%
because of the competitive adhesives resins products
end-market demand that increases sales volume.
Advanced Materials Segment (AM)
Produces specialty copolyesters, cellulose esters,
interlayers, and aftermarket window film products
mainly for end users in transportation, building
construction, durable goods. This segment
contributed a total of 25%, $2.4 billion of Eastman's
total revenue. Sales revenue increased slightly
compared to previous years due to higher premium
product sales volume. The acquisition of
Commonwealth expands the potential of the AM
segment by enabling further efficiencies such as
manufacturing in after-market automotive and
protective film markets.
AFP. 19%. 19%
AP. 14%. 14%
AM. 25%. 25%
F. 15%. 15%
SFI. 26%. 27%
2014 Revenue by Business Segment
AFP
AP
AM
F
SFI
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We estimated the 2015E growth to be ~5.45% due to
the company’s acquisition of Commonwealth
Laminating and Coating, Inc. This acquisition
increases the sales revenue by the addition of
window film product as well as its existing business.
Fibers Segment
As one of the two largest suppliers for acetate tow,
Eastman manufactures Estron acetate tow and
Estrobond triacetin plasticizers primarily for the use
of cigarette filters by regional cigarette producers.
Eastman is also the world largest producer of acetate
yarn, and the segment had sales revenue of $1.5
billion in 2014 which makes up to 15% of Eastman's
total sales. 55% of 2014 revenues from the fibers
segment are from Asia Pacific. The fiber segment is
expected to continue to be one of the stable cash flow
and earnings because of the few competition and by
having a reputation of high-quality products. Sales
increase due to higher selling prices and volume in
2014.
We estimate the 2015E growth rate to be ~2.0%
because we estimate the growth to be similar to
previous years.
Specialty Fluids & Intermediate Segment (SFI)
SFI manufactures diversified products that are sold
externally from the acetyl, olefins, and alkylamine
stream. Sales revenue $2.5 billion, 26% of total sales.
Despite a decrease of revenue for 2014, it was
relatively small due to the acquiring of turbine oil
business and Taminco which functional amines
products sales volume in 2014 and higher selling
prices offset by overall lower 2014 sales volume. The
lower sales volume was due to manufacturing
capacity shutdowns, increase internal use of
intermediates in the manufacture of higher-value
downstream derivatives in other Eastman business
segments and weakness in the heat transfer fluids
market.
We estimate the 2015E growth rate to be 3.7%
because of the completion of the aviation turbine oil
business acquisition. This enables Eastman to
expand SFI segment in growing revenue from the
global aviation industry.
Product Market8
Source: Thomson One
The chart above shows the breakdown of Eastman’s
end markets. Major markets are transportation,
building & constructions, consumables, and tobacco.
All of the major markets consists of products of
either one or combination of the business segments.
Marketing Strategy8
Eastman markets and sells through global marketing
and sales organization in the United States and 39
other countries which emerge into 135 countries.
Eastman targets industries where their products and
services cultivate differentiated value in business
solution. Since the products of Eastman are inputs to
the companies in the targeted market, the company
uses indirect channels such as distributors and
contract representatives. For customers outside the
United States, the company relies on distributors and
contract representatives to bring sales due to the
barrier of time difference and distance. Eastman also
uses direct channel to generate sales online via the
Customer Center website dedicated to serve
customers regardless of time and location.
Earnings Analysis8
2014 Compared with 2013
In the United States, sales revenue increase generated
by sales of AFP and SFI product lines and the
revenue from Taminco product lines acquisition in
December 2014. For Asia Pacific, there is a slight
decrease due to decrease SFI segment product lines
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which was balanced by AM segment of specialty
plastic products. Sales revenue in the Europe, Middle
East and Africa region increase slightly due to higher
AFP sales. The Taminco acquisition too affect the
sales revenue along the higher fibers segment sales.
In the Latin America region, there is an increase from
fibers and AM segments while decreased A&P
segment sales.
Between year 2013 till present, there is minimal
growth percentage as compared to the substantial
growth during 2010-2013. In Asia, there is a 2%
decline in sales revenue compared to 2% increase in
United States and Canada and Latin America and 6%
increase in the Europe, Middle East and Africa
region.
Derivatives
As a company that operates globally, Eastman is
exposed to market risks such as foreign currency
exchange rates, commodity prices and interest rates.
Since the company manufactures and sells in
different countries, there are foreign currency
exchange rate risk which Eastman manage by natural
offsets and currency options. Eastman principally
have Euro and Japanese Yen cash flow hedges
contract because these currencies are significant in
Europe and Asia Pacific region.
As Eastman is highly dependant of certain raw
material and energy sources, commodity hedging are
important to manage the volatility of price caused by
various reasons such as weather, supply and demand,
economic variables and any unpredictable factors.
The fluctuation in market prices allow Eastman
enters into various option and forward contracts.
Eastman manages interest expense using a mix of
fixed and variable rate debt. This is manage by
entering into interest rate swaps at a fair value.
Raw Materials8
Raw materials and energy are core inputs to the
company which make it a heavily invested part of the
business. To create unique and differentiated
products, Eastman integrates and optimizes across
their business streams. Availability of raw materials
and cost is highly dependent on world market
conditions, government regulation changes and other
factors. In 2012, 2013 and 2014, the cost of raw
materials and energy amount to 55%, 60% and 55%
respectively of total cost of operations.
Competitors
CompanyMarket Cap
(In Billions)
Market
Share
Profit
MarginsP/E ROE
DOW 50.7 6.7% 8.2% 12.4 19.1%
PX 30.0 1.4% 12.9% 20.4 24.7%
EMN 10.4 1.2% 7.1% 15.1 18.8%
CE 9.4 0.8% 9.8% 10.0 16.0%
AVERAGE 25.1 2.5% 9.5% 14.5 19.6% Source: Yahoo Finance
Figure above depicts firms who are registered in US
stock exchange that are comparable with Eastman
chemical company within the diversified chemical
sub industry of the materials sector. The range of
market capitalization within Eastman’s competitor
are wide.
Market capitalizations differ due to the maturity of
business and also the types of products offered to
diverse end user. The end targeted market of those
companies listed are for transportation, construction
& building.
Compared to a company like Dow Chemical
Company (DOW), the profit margin of Eastman is
better than of DOW. Although the profit margin is
not the highest among the competitors, the low profit
margin of Eastman is contributed by the unrealized
loss from derivatives and hedging. Provision for
income taxes from continuing operations is more
than 50% decrease from 2013.
The Price/Equity ratio for Eastman appears to be
ranked above average its competitors. Investors are
much willing to pay more for each dollar the
company generates. This translates to market’s
optimism towards Eastman’s growth prospect
compared to its competitors.
Even though Eastman’s ROE isn’t a leader among its
competitor, but it met the requirement based on one
of Warren Buffets value of investing strategy which
is having a 15% ROE. The lower ROE was caused
by several acquisitions in the past few years. We
expect that Eastman’s ROE will gradually rise over
the long run.
Research and Development
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Research and development is crucial for Eastman
and all related costs are incurred as expense.
Research and development at Eastman focuses on
improving production process and product while
reducing costs and increasing sales. Eastman
continuously invest in R&D initiatives to match
macro trends such as sustainability, consumerism
and reduce environmental impact.8
Research and development expenses are inevitable
being a chemical industry. Eastman spent $198
million in 2012 and $193 million in 2013 and in
2014, the company spent $227 million. This upward
trend is definitely to support the segments of the
recently acquired companies such as Taminco and
Commonwealth. Between year 2012 to 2014,
research and development has been 2% of total sales.
The average R&D spending is 4% of sales which is
close to Eastman’s R&D allocation. 9
Source: Chemical and Engineering News
Government Regulations8
As a chemical manufacturing company, Eastman has
to comply with regulations for transportation,
materials storage and waste disposal. Products has to
meet the standards set by government agencies for
the safety of end-users. Since operations are across
the globe, Eastman have to regulate using policies
and law according to the location of its
manufacturing plants. Any regulations related to the
environment as a whole affects company’s strategy
and costs allocation. As a whole, Eastman uphold
integrity by abiding the Code of Business Conduct.
Key Investment Positives
1. Company consistently innovates new world
class customized engineered products.
2. Focuses on eco-friendly Environment Company,
with achieving award from the Environmental
Protection Agency.
3. Competitive by having businesses and factories
globally.
4. Recent acquisition showed positive response on
sales volume and also producing a lower cost.
5. A consistent growth which outperform the
market.
6. Capacity expansion in Kuantan, Malaysia.
7. Generated free cash flow of $815 million,
strongest compared to its industry peer group.
8. Recognized by the Ethisphere Institute as a
2014 World’s Most Ethical Company for the
efforts to continually raise bar on leadership and
corporate behavior.
9. Dividend payout was consistent for previous
years.
10. Cheaper energy cost as oil price tumble.
Key Investment Negative
1. Eastman have a relatively high debt-to-equity
ratio.
2. Main products earnings and volumes are
correlated with the general economic growth.
3. Higher costs to comply with stricter
environmental emission regulation in the future.
4. Main stream of revenue are from the North
America.
5. Strengthening of US dollars will cause negative
impact on the Company’s financial results.
6. Market prices for commodity products, raw
material and energy costs will continue to be
volatile due to shortages or supply and demand.
7. Exposure of risks and uncertainties of future
acquisitions.
]
Valuation Summary
Upon extensive research on EMN, we have issued a
HOLD recommendation with the belief that the
stock price is lower than what we believe it should
be. We determined the intrinsic stock price using
the discounted (DCF) model, economic profit (EP)
model, dividend discount (DDM) model, relative
valuation P/E and the relative valuation growth P/E.
Our model estimate the intrinsic value as of
November 16, 2015.
Discounted Cash Flow (DCF) / Economic Profit
(EP) Method
Valuation Analysis
11 | P a g e
The DCF and EP valuation methods are effective
ways to predict the intrinsic value and price target. In
the model, we discounted the cash flow each year
anticipated free cash flow by the WACC. After
making other adjustments, we could derive a price of
$75. We also adjusted the stock price as of today by
making adjustments for the partial year that has
elapsed to be $80. Similarly, we had the same target
price of $75-80 by using the economic profit method.
Discounted Dividend Model (DDM) Eastman has been consistently paying out dividends
over 10 years and we anticipated a continuing
tradition in the near future. Therefore, we find the
DDM model to be somewhat reliable and we
discounted each dividend to calculate the intrinsic
value. This method resulted and showed a target
price to be $40.
Relative Valuation P/E Ratios The relative valuation model gave us an intrinsic
stock price of $47 signaling that the stock is currently
overvalued.
The relative valuation growth P/E model gave us a
intrinsic price of $75, signaling that the stock is
currently undervalued.
These models used our models EPS numbers and
compare EMN to other companies that they compete
against. Relative to their competitors, we have found
that EMN is undervalued.
In conclusion, we found that the DCF method to be
most reliable among these three models.
Used all of the assumptions we made throughout the
project, we projected their respective target price to
be $75-80.
We used various variables in our valuation model to
test for sensitivity. The variables used are value
drivers and important assumptions that are used in
intrinsic stock value in the various models.
Risk-Free Rate
The risk-free rate for the model was derived from
the 30-year treasury bond yield of 2.99% from
Yahoo Finance. 30-year treasury bond is one of the
longest risk-free rate available in the United States
which is important as we are not expecting Eastman
to shut its operation in the next 30 years. The
sensitivity analysis will depict the rate’s fluctuation
and how it affects the intrinsic stock price. With a
0.2% increments, the stock price decrease
approximately by four dollar. The increase of risk-
free rate will negatively affect the stock price.
Beta
Raw beta value used in the model is from
Bloomberg Terminal. After running various 5 year
returns for Eastman Chemical Company, we used
the average because the numbers for each time line
is very close. This indicated that Eastman operates
as the market grows. The beta used throughout the
model is 1.557. When risk free-rate is kept constant,
every increment of 0.10 in beta decreases the stock
price.
WACC vs CV Growth
We conducted the second sensitivity analysis in
relation between the growth of continuing value and
the weighted-average cost of capital. The result we
have gotten from the analysis is to measure the effect
between its stock prices. The outcome we acquire
from the analysis was given that is any possible 10
basis point decrease in continuing value growth stock
price would increase approximately one dollar while
weighted-average cost remained constant. Vice-
versa, while the continuing value growth remained
constant the price would increase approximately
$14.00 when weighted-average cost of capital
decreases by every 50 basis point.
This report was created by students enrolled in the
Applied Equity Valuation (FIN:4250) class at the
University of Iowa. The report was originally created
to offer an internal investment recommendation for
the University of Iowa Krause Fund and its advisory
board. The report also provides potential employers
and other interested parties an example of the
students’ skills, knowledge and abilities. Members
of the Krause Fund are not registered investment
advisors, brokers or officially licensed financial
professionals. The investment advice contained in
this report does not represent an offer or solicitation
to buy or sell any of the securities mentioned. Unless
otherwise noted, facts and figures included in this
report are from publicly available sources. This
Important Disclaimer
Sensitivity Analysis
12 | P a g e
report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the
Krause Fund may hold a financial interest in the
companies mentioned in this report.
1 "History." Eastman Chemical Company, n.d. Web.
21 Sept. 2015
2 “What is the relationship between inflation and
interest rate.” Investopedia, n.d. Web. 13 November
2015
3 "News Release: Gross Domestic Product.” U.S.
Department of Commerce Bureau of Economic
Analysis, 29 October 2015. Web. 13 November
2015
4 ”Oil-price shocks and the chemical industry:
Preparing for a volatile environment.” McKinsey &
Company, May 2015. Web. 6 Aug. 2015
5 "United States Fed Funds Rate.” Trading
Economics, 17 November 2015. Web. 17
November 2015.
6 “2015 Chemicals Trends.”
PricewaterhouseCoopers, n.d. Web. 14 September
2015
7 “Teaching Note Archer Daniels Midland
Company” American Chemical Society, n.d. Web.
14 September 2015
8“2014 Annual Report” EDGAR, 27 February 2015.
Web. 14 September 2015
9 “Chemical Makers Will Boost R&D But Slice
Capital Spending In 2015” Chemical and
Engineering News, 13 April 2015. Web. 14
November 2015
References
Eastman Chemical Company
Key Assumptions of Valuation Model
Ticker Symbol EMN
Current Share Price $68.60
Current Model Date 11/13/2015
Fiscal Year End Dec. 31
Cost of Equity 10.18%
Cost of Debt 5.08%
Beta 1.557
Risk‐Free Rate 2.99%
Equity Risk Premium 4.62%
Current Dividend Yield 1.70%
Marginal Tax Rate 35%
Normal Cash (% of sales) 3%
Expected Inflation 1.48%
WACC 7.32%
CV of ROIC 9.86%
CV Growth 5.0%
Eastman Chemical Company
Key Assumptions of Valuation Model
Beta
$74.91 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00
2.20% 232.16 173.30 136.40 111.05 92.52 78.35 67.15 58.05 50.49
2.40% 202.86 155.44 124.36 102.36 85.94 73.19 62.98 54.61 47.60
2.60% 179.57 140.53 113.97 94.70 80.05 68.50 59.16 51.42 44.90
2.80% 160.61 127.88 104.92 87.89 74.72 64.22 55.63 48.46 42.38
Risk‐Free Rate 3.00% 144.87 117.02 96.97 81.80 69.90 60.30 52.37 45.71 40.01
3.20% 131.58 107.59 89.91 76.31 65.50 56.68 49.35 43.13 37.79
3.40% 120.21 99.32 83.60 71.33 61.47 53.34 46.53 40.72 35.70
3.60% 110.37 92.00 77.94 66.81 57.76 50.25 43.90 38.45 33.72
3.80% 101.76 85.47 72.81 62.67 54.34 47.37 41.44 36.32 31.86
WACC
$74.91 6.90% 7.00% 7.10% 7.20% 7.30% 7.40% 7.50% 7.60% 7.70%
4.60% 82.41 78.76 75.40 72.30 69.42 66.76 64.27 61.96 59.79
4.70% 84.65 80.74 77.16 73.86 70.82 68.00 65.39 62.95 60.68
4.80% 87.11 82.91 79.08 75.56 72.33 69.35 66.58 64.02 61.63
4.90% 89.81 85.28 81.17 77.41 73.97 70.80 67.87 65.16 62.65
CV Growth 5.00% 92.80 87.89 83.46 79.43 75.74 72.37 69.26 66.40 63.74
5.10% 96.11 90.78 85.98 81.63 77.68 74.08 70.77 67.73 64.92
5.20% 99.82 93.98 88.76 84.06 79.81 75.94 72.41 69.18 66.20
5.30% 103.99 97.57 91.85 86.74 82.14 77.98 74.20 70.74 67.58
5.40% 108.72 101.60 95.31 89.73 84.73 80.23 76.16 72.46 69.08
MRP
$74.91 4.20% 4.30% 4.40% 4.50% 4.60% 4.70% 4.80% 4.90% 5.00%
9.50% 90.81 85.65 80.92 76.57 72.55 68.83 65.37 62.15 59.14
9.60% 91.91 86.69 81.91 77.51 73.45 69.69 66.19 62.94 59.89
9.70% 92.99 87.72 82.88 78.44 74.33 70.53 67.00 63.71 60.63
9.80% 94.05 88.72 83.84 79.34 75.20 71.36 67.79 64.46 61.36
CV of ROIC 9.90% 95.09 89.70 84.77 80.23 76.04 72.16 68.56 65.20 62.06
10.00% 96.10 90.66 85.68 81.10 76.87 72.95 69.32 65.93 62.76
10.10% 97.10 91.61 86.58 81.95 77.68 73.73 70.06 66.64 63.44
10.20% 98.07 92.53 87.46 82.79 78.48 74.49 70.78 67.33 64.11
10.30% 99.03 93.44 88.32 83.61 79.26 75.24 71.50 68.01 64.76
Marginal Tax Rate
$74.91 31.00% 32.00% 33.00% 34.00% 35.00% 36.00% 37.00% 38.00% 39.00%
3.10% 77.81 76.94 76.05 75.16 74.25 73.34 72.41 71.47 70.51
3.60% 77.99 77.12 76.23 75.34 74.43 73.52 72.59 71.64 70.69
4.10% 78.16 77.29 76.41 75.51 74.60 73.68 72.75 71.81 70.85
4.60% 78.33 77.45 76.57 75.67 74.76 73.84 72.91 71.97 71.01
Cost of Debt 5.10% 78.48 77.61 76.72 75.82 74.92 74.00 73.06 72.12 71.16
5.60% 78.63 77.75 76.87 75.97 75.06 74.14 73.21 72.26 71.30
6.10% 78.77 77.89 77.01 76.11 75.20 74.28 73.34 72.40 71.44
6.60% 78.90 78.03 77.14 76.24 75.33 74.41 73.47 72.53 71.57
7.10% 79.03 78.15 77.26 76.36 75.45 74.53 73.60 72.65 71.69
Eastman Chemical Company
Revenue Decomposition
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV
Sales
Specialty Fluids & Intermediates 2,318 2,497 2,490 2,583 2,627 2,699 2,758 2,827 2,893 2,963 3,033 3,106 3,180
Advanced Materials 1,694 2,349 2,378 2,508 2,880 3,022 3,166 3,314 3,546 3,681 4,149 4,556 4,871
Additives & Functional Products 1,332 1,719 1,821 1,882 1,983 2,081 2,190 2,305 2,484 2,624 2,741 2,952 3,117
Fibers 1,315 1,441 1,457 1,486 1,516 1,546 1,577 1,609 1,641 1,674 1,707 1,741 1,776
Adhesives & Plasticizers 1,432 1,326 1,363 1,435 1,489 1,548 1,574 1,599 1,688 1,696 1,641 1,665 1,704
Other 11 18 18 18 18 18 18 18 18 18 18 18 18
Total 8,102 9,350 9,527 9,912 10,513 10,914 11,284 11,671 12,270 12,655 13,289 14,038 14,665
Percent of Total (%)
Specialty Fluids & Intermediates 28.61% 26.71% 26.14% 26.06% 24.99% 24.73% 24.45% 24.22% 23.58% 23.41% 22.82% 22.12% 21.68%
Advanced Materials 20.91% 25.12% 24.96% 25.30% 27.39% 27.69% 28.06% 28.39% 28.90% 29.09% 31.22% 32.45% 33.22%
Additives & Functional Products 16.44% 18.40% 19.11% 18.99% 18.86% 19.07% 19.41% 19.75% 20.24% 20.73% 20.63% 21.03% 21.25%
Fibers 16.23% 15.41% 15.29% 14.99% 14.42% 14.17% 13.98% 13.78% 13.37% 13.23% 12.85% 12.40% 12.11%
Adhesives & Plasticizers 17.68% 14.18% 14.31% 14.48% 14.17% 14.18% 13.95% 13.70% 13.76% 13.40% 12.35% 11.86% 11.62%
Other 0.14% 0.19% 0.19% 0.18% 0.17% 0.16% 0.16% 0.15% 0.15% 0.14% 0.14% 0.13% 0.12%
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Growth (%)
Specialty Fluids & Intermediates ‐‐ 7.72% ‐0.28% 3.72% 1.72% 2.72% 2.22% 2.47% 2.35% 2.41% 2.38% 2.39% 2.38%
Advanced Materials 41.76% 38.67% 1.23% 5.45% 14.85% 4.94% 4.77% 4.66% 7.02% 3.79% 12.71% 9.81% 6.92%
Additives & Functional Products ‐27.77% 29.05% 5.93% 3.37% 5.35% 4.94% 5.23% 5.24% 7.78% 5.63% 4.48% 7.70% 5.57%
Fibers 2.81% 9.58% 1.11% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Adhesives & Plasticizers ‐49.93% ‐7.40% 2.79% 5.31% 3.76% 3.94% 1.71% 1.57% 5.57% 0.46% ‐3.22% 1.45% 2.33%
Other ‐‐ 63.64% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total 12.87% 15.40% 1.89% 4.04% 6.06% 3.81% 3.39% 3.43% 5.14% 3.13% 5.02% 5.63% 4.47%
Eastman Chemical Company
Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV
Sales 8102.00 9350.00 9527.00 9860.45 10205.56 10562.76 10932.45 11315.09 11654.54 12004.18 12364.30 12735.23 13117.29
Cost of sales (5980.00) (6141.00) (6856.00) (7198.12) (7450.06) (7710.81) (7980.69) (8260.01) (8507.81) (8763.05) (9025.94) (9296.72) (9575.62)
Less: Depreciation (360.00) (433.00) (450.00) (463.50) (477.41) (491.73) (506.48) (521.67) (537.32) (553.44) (570.05) (587.15) (604.76)
Gross profit (loss) 1762.00 2776.00 2221.00 2198.82 2278.10 2360.22 2445.28 2533.40 2609.40 2687.68 2768.31 2851.36 2936.91
Selling, general and administrative expenses (644.00) (645.00) (755.00) (777.65) (800.98) (825.01) (849.76) (875.25) (901.51) (928.55) (956.41) (985.10) (1014.66)
Research and development expenses (198.00) (193.00) (227.00) (233.81) (240.82) (248.05) (255.49) (263.16) (271.05) (279.18) (287.56) (296.18) (305.07)
Asset impairments and restructuring charges / gains, net (120.00) (76.00) (77.00) (78.16) (79.33) (80.52) (81.72) (82.95) (84.20) (85.46) (86.74) (88.04) (89.36)
Operating earnings / loss 800.00 1862.00 1162.00 1109.21 1156.97 1206.64 1258.31 1312.04 1352.65 1394.49 1437.61 1482.04 1527.82
Net interest expense (143.00) (180.00) (187.00) (368.20) (360.83) (353.62) (346.55) (339.61) (332.82) (326.17) (319.64) (313.25) (306.98)
Other charges / income, net (8.00) (3.00) 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Earnings / loss from continuing operations before income taxes 649.00 1679.00 990.00 741.01 796.13 853.02 911.76 972.43 1019.83 1068.32 1117.96 1168.79 1220.83
Provision / benefit for income taxes from continuing operations (206.00) (507.00) (235.00) (259.35) (278.65) (298.56) (319.12) (340.35) (356.94) (373.91) (391.29) (409.08) (427.29)
Earnings / loss from continuing operations 443.00 1172.00 755.00 481.65 517.49 554.47 592.65 632.08 662.89 694.41 726.68 759.71 793.54
Gain / loss from disposal of discontinued operations, net of tax 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Earnings / loss from discontinued operations, net of tax 0.00 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net earnings / loss 444.00 1172.00 755.00 481.65 517.49 554.47 592.65 632.08 662.89 694.41 726.68 759.71 793.54
Net earnings attributable to noncontrolling interest (7.00) (7.00) (6.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net earnings / loss attributable to Eastman 437.00 1165.00 749.00 481.65 517.49 554.47 592.65 632.08 662.89 694.41 726.68 759.71 793.54
Earnings per share
Basic earnings per share attributable to Eastman 3.00 7.57 5.03 3.24 3.48 3.72 3.98 4.24 4.44 4.65 4.86 5.08 5.30
Dividends per share 1.08 1.25 1.45 1.45 1.46 1.46 1.47 1.47 1.56 1.64 1.73 1.79 1.83
Total shares outstanding (in millions) 145.50 152.46 148.60 148.70 148.81 148.91 149.01 149.14 149.28 149.41 149.55 149.69 149.83
Eastman Chemical CompanyBalance Sheet
Fiscal Years Ending Dec. 31 2,012 2,013 2,014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CVAssetsCurrent Assets Cash and cash equivalents 249 237 214 413 207 1,546 897 1,213 2,049 1,672 2,489 1,726 2,181 Trade receivables, net 846 880 936 986 1,021 1,056 1,093 1,132 1,165 1,200 1,236 1,274 1,312 Miscellaneous receivables 151 208 264 247 255 264 273 283 291 300 309 318 328 Inventories 1,260 1,264 1,509 1,479 1,531 1,584 1,640 1,697 1,748 1,801 1,855 1,910 1,968 Other current assets 88 251 250 234 238 241 245 249 252 256 260 264 268 Current assets held for sale 0 0 0 0 0 0 0 0 0 0 0 0 0 Total current assets 2,594 2,840 3,173 3,359 3,252 4,692 4,148 4,573 5,506 5,229 6,149 5,492 6,056
Properties 1 Properties and equipment at cost 9,681 9,958 11,026 11,376 11,717 12,069 12,431 12,804 13,188 13,584 13,991 14,411 14,843 Less: Accumulated depreciation (5,500) (5,668) (5,939) (6,403) (6,880) (7,372) (7,878) (8,400) (8,937) (9,491) (10,061) (10,648) (11,253) Properties and equipment held for sale, net 0 0 0 0 0 0 0 0 0 0 0 0 0 Net properties 4,181 4,290 5,087 4,974 4,837 4,697 4,553 4,404 4,251 4,093 3,930 3,763 3,591
Other AssetsGoodwill 2,644 2,637 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486
Intangible assets, net of accumulated amortization 1,849 1,781 2,905 2,736 2,567 2,398 2,229 2,060 1,891 1,722 1,553 1,384 1,215Other noncurrent assets 351 297 421 427 434 440 446 453 460 467 474 481 488Noncurrent assets held for sale 0 0 0 0 0 0 0 0 0 0 0 0 0 Other assets 4,844 4,715 7,812 7,649 7,487 7,324 7,161 6,999 6,837 6,675 6,513 6,351 6,189
Total assets 11,619 11,845 16,072 15,982 15,575 16,713 15,863 15,976 16,594 15,997 16,592 15,605 15,835
Liabilities and Shareholder's EquityCurrent Liabilities Payables and other current liabilities 1,360 1,470 1,721 1,773 1,826 1,881 1,937 1,995 2,055 2,117 2,180 2,246 2,313 Short‐term borrowings 4 0 301 250 0 998 169 250 798 250 903 0 298 Total current liabilities 1,364 1,470 2,022 2,023 1,826 2,879 2,106 2,245 2,853 2,367 3,083 2,246 2,611Long‐term borrowings 4,779 4,254 7,248 7,103 6,961 6,822 6,685 6,552 6,421 6,292 6,166 6,043 5,922Deferred income tax liabilities 91 496 946 978 807 910 898 872 894 888 884 889 887Post‐employment obligations 1,856 1,297 1,498 1,551 1,605 1,658 1,712 1,765 1,819 1,872 1,926 1,979 2,032Other long‐term liabilities 501 453 768 574 598 647 606 617 623 616 619 619 618Noncurrent liabilities related to assets held for sale 0 0 0 0 0 0 0 0 0 0 0 0 0Total liabilities 8,917 7,816 13,133 12,229 11,797 12,916 12,008 12,051 12,609 12,035 12,678 11,775 12,070
Shareholder's EquityCommon stock and additional paid‐in capital 1,711 1,780 1,819 1,824 1,829 1,833 1,838 1,844 1,850 1,856 1,863 1,869 1,876Retained earnings 3,038 4,012 4,545 4,810 5,111 5,448 5,822 6,234 6,664 7,113 7,581 8,073 8,592 Accumulated other comprehensive income / loss 123 171 (277) (133) (129) (140) (118) (89) (50) (71) (93) (122) (105) Total stockholders' equity before treasury stock at cost 4,872 5,963 6,087 6,501 6,811 7,141 7,542 7,989 8,464 8,898 9,351 9,820 10,363Less: Treasury stock at cost (1,929) (2,167) (2,577) (2,835) (3,118) (3,430) (3,773) (4,150) (4,565) (5,022) (5,524) (6,076) (6,684) Total Eastman stockholders' equity 2,943 3,796 3,510 3,666 3,693 3,711 3,769 3,839 3,899 3,876 3,827 3,744 3,679Noncontrolling interest 85 79 80 86 86 86 86 86 86 86 86 86 86 Total shareholder's equity 3,028 3,875 3,590 3,752 3,779 3,797 3,855 3,925 3,985 3,962 3,913 3,830 3,765
Total liabilities and stockholders' equity 11,945 11,691 16,723 15,982 15,575 16,713 15,863 15,976 16,594 15,997 16,592 15,605 15,835
Eastman Chemical Company
Common Size Income Statement
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of sales ‐73.81% ‐65.68% ‐71.96% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00%
Less: Depreciation ‐4.44% ‐4.63% ‐4.72% ‐4.70% ‐4.68% ‐4.66% ‐4.63% ‐4.61% ‐4.61% ‐4.61% ‐4.61% ‐4.61% ‐4.61%
Gross profit (loss) 21.75% 29.69% 23.31% 22.30% 22.32% 22.34% 22.37% 22.39% 22.39% 22.39% 22.39% 22.39% 22.39%
Selling, general and administrative expenses ‐7.95% ‐6.90% ‐7.92% ‐7.89% ‐7.85% ‐7.81% ‐7.77% ‐7.74% ‐7.74% ‐7.74% ‐7.74% ‐7.74% ‐7.74%
Research and development expenses ‐2.44% ‐2.06% ‐2.38% ‐2.37% ‐2.36% ‐2.35% ‐2.34% ‐2.33% ‐2.33% ‐2.33% ‐2.33% ‐2.33% ‐2.33%
Asset impairments and restructuring charges / gains, net ‐1.48% ‐0.81% ‐0.81% ‐0.79% ‐0.78% ‐0.76% ‐0.75% ‐0.73% ‐0.72% ‐0.71% ‐0.70% ‐0.69% ‐0.68%
Other operating income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Operating earnings / loss 9.87% 19.91% 12.20% 11.25% 11.34% 11.42% 11.51% 11.60% 11.61% 11.62% 11.63% 11.64% 11.65%
Net interest expense ‐1.76% ‐1.93% ‐1.96% ‐3.73% ‐3.54% ‐3.35% ‐3.17% ‐3.00% ‐2.86% ‐2.72% ‐2.59% ‐2.46% ‐2.34%
Income from equity investment in Genencor 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Early debt extinguishment costs 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other charges / income, net ‐0.10% ‐0.03% 0.16% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Earnings / loss from continuing operations before income taxes 8.01% 17.96% 10.39% 7.51% 7.80% 8.08% 8.34% 8.59% 8.75% 8.90% 9.04% 9.18% 9.31%
Provision / benefit for income taxes from continuing operations ‐2.54% ‐5.42% ‐2.47% ‐2.63% ‐2.73% ‐2.83% ‐2.92% ‐3.01% ‐3.06% ‐3.11% ‐3.16% ‐3.21% ‐3.26%
Earnings / loss from continuing operations 5.47% 12.53% 7.92% 4.88% 5.07% 5.25% 5.42% 5.59% 5.69% 5.78% 5.88% 5.97% 6.05%
Earnings / loss from discontinued operations, net of tax 0.00% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Gain / loss from disposal of discontinued operations, net of tax 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net earnings / loss 5.48% 12.53% 7.95% 4.88% 5.07% 5.25% 5.42% 5.59% 5.69% 5.78% 5.88% 5.97% 6.05%
Net earnings attributable to noncontrolling interest ‐0.09% ‐0.07% ‐0.06% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net earnings / loss attributable to Eastman 5.39% 12.46% 7.88% 4.88% 5.07% 5.25% 5.42% 5.59% 5.69% 5.78% 5.88% 5.97% 6.05%
Eastman Chemical Company
Common Size Balance Sheet
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Assets
Current Assets
Cash and cash equivalents 3.07% 2.53% 2.25% 4.19% 2.03% 14.63% 8.20% 10.72% 17.58% 13.93% 20.13% 13.55% 16.63%
Short‐term time deposits 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Trade receivables, net 13.10% 13.62% 14.49% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Miscellaneous receivables 2.34% 3.22% 4.09% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Inventories 19.50% 19.57% 23.36% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
Other current assets 1.36% 3.89% 3.87% 2.38% 2.33% 2.29% 2.24% 2.20% 2.16% 2.13% 2.10% 2.07% 2.04%
Current assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total current assets 39.37% 42.83% 48.05% 34.07% 31.86% 44.42% 37.94% 40.42% 47.24% 43.56% 49.73% 43.12% 46.17%
Properties
Properties and equipment at cost 119.49% 106.50% 115.73% 132.98% 131.43% 131.52% 132.74% 131.65% 125.42% 124.42% 125.19% 125.76% 127.68%
Less: Accumulated depreciation ‐67.88% ‐60.62% ‐62.34% ‐64.93% ‐67.41% ‐69.79% ‐72.06% ‐74.24% ‐76.68% ‐79.06% ‐81.37% ‐83.61% ‐85.78%
Properties and equipment held for sale, 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Net properties 51.60% 45.88% 53.40% 68.05% 64.01% 61.73% 60.68% 57.41% 48.74% 45.36% 43.82% 42.15% 41.90%
Other Assets
Goodwill 32.63% 28.20% 47.09% 45.49% 43.96% 42.47% 41.03% 39.65% 38.49% 37.37% 36.28% 35.23% 34.20%
Intangible assets, net of accumulated amo 22.82% 19.05% 30.49% 27.75% 25.15% 22.70% 20.39% 18.21% 16.23% 14.35% 12.56% 10.87% 9.26%
Other noncurrent assets 4.33% 3.18% 4.42% 4.33% 4.25% 4.17% 4.08% 4.00% 3.95% 3.89% 3.83% 3.77% 3.72%
Noncurrent assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other assets 59.79% 50.43% 82.00% 77.57% 73.36% 69.34% 65.51% 61.86% 58.66% 55.60% 52.67% 49.87% 47.18%
Total assets 150.77% 139.14% 183.45% 179.69% 169.23% 175.49% 164.13% 159.68% 154.64% 144.53% 146.22% 135.14% 135.25%
Liabilities and Shareholder's Equity
Current Liabilities
Payables and other current liabilities 16.79% 15.72% 18.06% 17.98% 17.89% 17.80% 17.72% 17.63% 17.63% 17.63% 17.63% 17.63% 17.63%
Short‐term borrowings 0.05% 0.00% 3.16% 2.54% 0.00% 9.45% 1.55% 2.21% 6.85% 2.08% 7.30% 0.00% 2.27%
Total current liabilities 16.84% 15.72% 21.22% 20.51% 17.89% 27.25% 19.26% 19.84% 24.48% 19.71% 24.94% 17.63% 19.90%
Long‐term borrowings 58.99% 45.50% 76.08% 72.04% 68.21% 64.58% 61.15% 57.90% 55.09% 52.42% 49.87% 47.45% 45.15%
Deferred income tax liabilities 1.12% 5.30% 9.93% 9.92% 7.91% 8.62% 8.22% 7.71% 7.67% 7.40% 7.15% 6.98% 6.76%
Post‐employment obligations 22.91% 13.87% 15.72% 15.73% 15.73% 15.70% 15.66% 15.60% 15.60% 15.60% 15.57% 15.54% 15.49%
Other long‐term liabilities 6.18% 4.84% 8.06% 5.82% 5.86% 6.12% 5.55% 5.45% 5.35% 5.13% 5.00% 4.86% 4.71%
Noncurrent liabilities related to assets hel 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total liabilities 106.04% 85.24% 131.02% 124.02% 115.59% 122.28% 109.84% 106.50% 108.19% 100.25% 102.54% 92.46% 92.02%
Shareholder's Equity
Common stock and additional paid‐in capi 21.12% 19.04% 19.09% 18.50% 17.92% 17.36% 16.81% 16.30% 15.88% 15.47% 15.07% 14.68% 14.30%
Retained earnings 37.50% 42.91% 47.71% 48.79% 50.08% 51.57% 53.25% 55.09% 57.18% 59.25% 61.32% 63.39% 65.50%
Accumulated other comprehensive incom 1.52% 1.83% ‐2.91% ‐1.35% ‐1.26% ‐1.32% ‐1.08% ‐0.78% ‐0.43% ‐0.59% ‐0.75% ‐0.96% ‐0.80%
Total stockholders' equity before treasu 60.13% 63.78% 63.89% 65.93% 66.74% 67.61% 68.98% 70.61% 72.62% 74.12% 75.63% 77.11% 79.00%
Less: Treasury stock at cost ‐23.81% ‐23.18% ‐27.05% ‐28.75% ‐30.55% ‐32.47% ‐34.51% ‐36.68% ‐39.17% ‐41.83% ‐44.68% ‐47.71% ‐50.96%
Total Eastman stockholders' equity 36.32% 40.60% 36.84% 37.18% 36.18% 35.13% 34.47% 33.93% 33.45% 32.29% 30.96% 29.40% 28.04%
Noncontrolling interest 1.05% 0.84% 0.84% 0.87% 0.84% 0.81% 0.79% 0.76% 0.74% 0.72% 0.70% 0.68% 0.66%
Total equity 37.37% 41.44% 37.68% 38.05% 37.03% 35.95% 35.26% 34.69% 34.19% 33.01% 31.65% 30.07% 28.70%
Total liabilities and stockholders' equity 143.41% 126.68% 168.70% 162.08% 152.62% 158.23% 145.10% 141.19% 142.38% 133.26% 134.19% 122.54% 120.72%
Eastman Chemical CompanyCash Flow Statement
Fiscal Years Ending Dec. 31 2,005 2,006 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 Cash flows from operating activities Net earnings / loss 557 409 300 346 136 427 647 444 1,172 757Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 304 308 327 267 274 280 273 360 433 450 Asset impairment charges 12 62 138 1 179 8 0 46 28 52 Gain on sale of assets 0 (74) (8) (14) 0 0 (70) 0 0 (5) Income from equity investment in Genencor (173) ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ Early debt extinguishment costs 46 ‐‐ ‐‐ 0 0 115 ‐‐ ‐‐ ‐‐ ‐‐ Provision / benefit for deferred income taxes 115 7 (9) (71) 185 47 (22) 48 331 99 Mark‐to‐market gain / loss on pension and other postretirement benefit / loss plans ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 147 247 (383) 304Changes in operating assets and liabilities, net of effect of acquisitions and divestitures Increase / decrease in trade receivables 60 (82) (28) 261 2 (358) (73) 48 (38) 19 Increase / decrease in inventories (110) (99) 66 (95) 100 (160) (156) 38 (6) (61) Increase / decrease in trade payables 71 53 48 (211) 16 152 (51) 10 (2) (30) Increase / decrease in liabilities for employee benefits and incentive pay (63) (44) (55) 7 (149) ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ Pension and other postretirement contributions in excess of / less than expenses ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 12 (103) (97) (149) (165) Variable compensation in excess of / less than expenses ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 37 15 26 82 27 Other items, net (50) 69 (47) 162 15 15 18 (42) (171) (39)
Net cash provided by / used in operating activities 769 609 732 653 758 575 625 1,128 1,297 1,408
Cash flows from investing activities Additions to properties and equipment (343) (389) (518) (634) (310) (243) (457) (465) (483) (593) Proceeds from redemption of short‐term time deposits ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 0 0 200 0 0 Proceeds from sale of assets and investments 50 322 202 337 30 13 651 7 31 13 Proceeds from the sale of equity investment in Genencor, net 417 ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ Acquisitions, net of cash acquired (125) 0 (40) (38) (68) (190) (156) (2,669) 0 (3,509) Additions to short‐term time deposits ‐‐ ‐‐ ‐‐ ‐‐ 0 0 (200) ‐‐ ‐‐ ‐‐ Additions to capitalized software (11) (16) (11) (10) (8) (7) (9) (5) (5) (3) Other items, net (6) (11) 32 (31) (13) (15) 29 (30) 0 1Net cash used in / provided by investing activities (18) (94) (335) (376) (369) (442) (142) (2,962) (457) (4,091)
Cash flows from financing activities Net increase / decrease in commercial paper borrowings (150) (50) (5) (7) 3 2 1 (1) 425 (190) Proceeds from borrowings 189 ‐‐ 0 0 248 496 (36) 3,511 150 3,565 Repayment of borrowings (544) 0 (17) (175) (101) (620) (2) (1,866) (1,105) (125) Dividends paid to stockholders (142) (144) (147) (135) (128) (127) (136) (192) (140) (210) Treasury stock purchases 0 0 (382) (501) (21) (280) (316) 0 (238) (410) Proceeds from stock option exercises and other items, net 100 93 103 39 17 118 66 52 49 34Net cash used in / provided by financing activities (547) (101) (448) (779) 18 (411) (423) 1,504 (859) 2,664Effect of exchange rate changes on cash and cash equivalents (5) 1 0 1 (1) 1 1 2 7 (4)Net change in cash and cash equivalents 199 415 (51) (501) 406 (277) 61 (328) (12) (23)Cash and cash equivalents at beginning of period 325 524 939 888 387 793 516 577 249 237
Cash and cash equivalents at end of period 524 939 888 387 793 516 577 249 237 214
Eastman Chemical CompanyCash Flow Statement
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CVCash flows from operating activities Net earnings / loss 482 517 554 593 632 663 694 727 760 794 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 464 477 492 506 522 537 553 570 587 605 Amortization of intangibles 169 169 169 169 169 169 169 169 169 169 Provision / benefit for deferred income taxes 32 (172) 104 (12) (27) 22 (6) (4) 4 (2)Changes in operating assets and liabilities, net of effect of acquisitions and divestitures Increase / decrease in trade receivables (50) (35) (36) (37) (38) (34) (35) (36) (37) (38) Increase / decrease in miscellanous receivables 17 (9) (9) (9) (10) (8) (9) (9) (9) (10) Increase / decrease in inventories 30 (52) (54) (55) (57) (51) (52) (54) (56) (57) Increase / decrease in other current assets 16 (3) (4) (4) (4) (4) (4) (4) (4) (4) Increase / decrease in intangible assets Increase / decrease in payables and other liability 52 53 55 56 58 60 62 63 65 67 Increase / decrease in short term borrowings (51) (250) 998 (829) 81 548 (548) 653 (903) 298 Increase / decrease in post‐employment obligations 53 53 53 53 53 53 53 53 53 53 Increase / decrease in other long‐term liabilities (194) 24 48 (40) 11 6 (8) 3 1 (1)
Net cash provided by / used in operating activities 1,019 775 2,372 391 1,391 1,961 871 2,132 631 1,874
Cash flows from investing activities Additions to properties and equipment (350) (341) (352) (362) (373) (384) (396) (408) (420) (432) Other noncurrent assets (6) (6) (6) (7) (7) (7) (7) (7) (7) (7)Net cash used in / provided by investing activities (356) (348) (358) (369) (380) (391) (402) (414) (427) (439)
Cash flows from financing activities Proceeds from borrowings (145) (142) (139) (136) (134) (131) (128) (126) (123) (121) Dividends paid to stockholders (216) (217) (218) (219) (220) (233) (246) (258) (268) (275) Treasury stock purchases (258) (283) (312) (343) (377) (415) (457) (502) (552) (608) Proceeds from stock option exercises and other items, net 5 5 5 5 6 6 6 6 6 6 Accumulated other comprehensive income/loss 144 5 (11) 22 30 38 (21) (22) (29) 17 Noncontrolling interest 6 0 0 0 0 0 0 0 0 0 Net cash used in / provided by financing activities (464) (633) (675) (672) (695) (735) (845) (901) (967) (980)Net change in cash and cash equivalents 199 (206) 1,339 (649) 316 836 (377) 817 (763) 455Cash and cash equivalents at beginning of period 214 413 207 1,546 897 1,213 2,049 1,672 2,489 1,726
Cash and cash equivalents at end of period 413 207 1,546 897 1,213 2,049 1,672 2,489 1,726 2,181
Eastman Chemical CompanyValue Driver Estimation
Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV
NOPLAT ComputationEBITA:Sales 8102 9350 9527 9860 10206 10563 10932 11315 11655 12004 12364 12735 13117Less: Cost of sales (5980) (6141) (6856) (7198) (7450) (7711) (7981) (8260) (8508) (8763) (9026) (9297) (9576)Less: Depreciation (360) (433) (450) (464) (477) (492) (506) (522) (537) (553) (570) (587) (605)Less: Selling, general and administrative expense (644) (645) (755) (778) (801) (825) (850) (875) (902) (929) (956) (985) (1015)Less: Research and development expenses (198) (193) (227) (234) (241) (248) (255) (263) (271) (279) (288) (296) (305)Plus: Implied interest on PV of operating leases 12 14 22 15 14 13 13 14 15 16 17 17 18EBITA: 932 1952 1261 1202 1250 1301 1353 1409 1452 1496 1541 1587 1635
Less:Adjusted TaxesIncome Tax provision 206 507 235 259 279 299 319 340 357 374 391 409 427Plus: Tax shield on asset and impairments 42 27 27 27 28 28 29 29 29 30 30 31 31Plus: Tax shield on interest expense 50 63 65 129 126 124 121 119 116 114 112 110 107Plus: Tax shield on implied interest of operating l 4 5 8 5 5 5 5 5 5 6 6 6 6Less: Tax shield on other charges/income, net (3) (1) 5 0 0 0 0 0 0 0 0 0 0Adjusted Taxes 299 600 340 421 437 455 474 493 508 524 539 556 572
Plus: Net Deferred Tax
Change in Deferred Taxes (119) 405 450 32 (172) 104 (12) (27) 22 (6) (4) 4 (2)
NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061
Invested Capital ComputationCurrent Asset:Normal Cash (3% of Sales) 243 281 286 296 306 317 328 339 350 360 371 382 394Trade account receivables, net 846 880 936 986 1021 1056 1093 1132 1165 1200 1236 1274 1312Miscellaneous receivables 151 208 264 247 255 264 273 283 291 300 309 318 328Inventory 1260 1264 1509 1479 1531 1584 1640 1697 1748 1801 1855 1910 1968Other current assets 193 251 250 234 238 241 245 249 252 256 260 264 268Total Current Asset 2693 2884 3245 3242 3351 3463 3579 3700 3807 3917 4031 4148 4268
Current Liabilities: Payables and other current liabilities 1360 1470 1721 1773 1826 1881 1937 1995 2055 2117 2180 2246 2313 Total Current Liabilities 1360 1470 1721 1773 1826 1881 1937 1995 2055 2117 2180 2246 2313
Net Operating Working Capital 1333 1414 1524 1469 1525 1582 1642 1705 1752 1801 1851 1902 1955
Plus: Property, Plant, and Equiptment (PPE), net 4181 4290 5087 4974 4837 4697 4553 4404 4251 4093 3930 3763 3591
Plus: Non‐goodwill Intangible Assets 1849 1781 2905 2736 2567 2398 2229 2060 1891 1722 1553 1384 1215Plus: PV of Operating Leases 237 273 436 291 269 264 257 271 290 311 328 340 348
Invested Capital 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389 7109
NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061Beginning Invested Capital 4152 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389ROIC 12.37% 23.11% 17.67% 8.18% 6.77% 10.32% 9.70% 10.24% 11.44% 11.81% 12.59% 13.52% 14.36%
NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061Beginning Invested Capital 4152 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389EP 209 1200 803 85 (53) 275 213 253 347 367 418 475 520
NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061Beginning Invested Capital 4152 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389Ending Invested Capital 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389 7109FCF (2934) 1599 (823) 1296 913 1205 1129 1130 1221 1224 1262 1310 1341
Eastman Chemical Company
Weighted Average Cost of Capital (WACC) Estimation 7.32%
Risk Free Rate 2.99%
Equity Risk Premium 4.62%
Beta
5 Year - Daily 1.409
5 Year - Weekly 1.478
5 Year - Monthly 1.676
5 Year - Quarterly 1.666
1.557
Cost of Equity, Re (Re=Rf+Be(MRP)) 10.18%
Pre‐Tax Cost of Debt
Marginal Tax Rate 35%
Cost of Debt 5.08%
Equity= Price * Shares Outstanding
Equity= 10193.96
Market Value of Equity 10193.96
Debt = Long‐Term Debt + Current Portion of Debt + PV of Operating Leases
Debt= 7,248
Market Value of Debt 7,248
Market Value of the Firm 17,442
WACC 7.32%
Eastman Chemical CompanyEffects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 2,209,800Average Time to Maturity (years): 5.96Expected Annual Number of Options Exercised: 370,726
Current Average Strike Price: 45.94$ Cost of Equity: 10.18%Current Stock Price: $68.60
2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024EIncrease in Shares Outstanding: 103,905 103,905 103,905 103,905 128,746 134,957 137,018 139,079 139,079 139,079Average Strike Price: 45.94$ 45.94$ 45.94$ 45.94$ 45.94$ 45.94$ 45.94$ 45.94$ 45.94$ 45.94$ Increase in Common Stock Account: 4,772,876 4,772,876 4,772,876 4,772,876 5,913,969 6,199,242 6,293,934 6,388,626 6,388,626 6,388,626
Change in Treasury Stock 25,770 28,347 31,182 34,300 37,730 41,503 45,653 50,218 55,240 60,764Expected Price of Repurchased Shares: 68.60$ 75.59$ 83.28$ 91.77$ 101.11$ 111.41$ 122.76$ 135.26$ 149.03$ 164.21$ Number of Shares Repurchased: in millions 376 375 374 374 373 373 372 371 371 370
Shares Outstanding (beginning of the year) 148,600,000 148,703,529 148,807,059 148,910,589 149,014,120 149,142,493 149,277,077 149,413,723 149,552,431 149,691,140Plus: Shares Issued Through ESOP 103,905 103,905 103,905 103,905 128,746 134,957 137,018 139,079 139,079 139,079Less: Shares Repurchased in Treasury 376 375 374 374 373 373 372 371 371 370 Shares Outstanding (end of the year) 148,703,529 148,807,059 148,910,589 149,014,120 149,142,493 149,277,077 149,413,723 149,552,431 149,691,140 149,829,849
Eastman Chemical Company
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 5.00% Dividend Yield 1.70%
CV ROIC 9.86%
WACC 7.32%
Cost of Equity 10.18%
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024CV
DCF Model
FCF 1,296 913 1,205 1,129 1,130 1,221 1,224 1,262 1,310 1,341
Continuing Value (CV) 22,504
WACC 7.32%
CF to Discount
Periods to Discount 1 2 3 4 5 6 7 8 9 9
Present Value of Cash Flows 1,208 792 975 851 794 799 746 717 693 11,912
Value of Operating Assets 19,487
Add: Excess Cash 0
Add: Other Non Current Assets 421
Less: Current Portion of Debt 301
Less: Long Term Debt 7,248
Less: PV of Operating Leases 436
Less: PV of Employees Stock Options 58
Less: Environmental Contingencies 345
Less: PV of Pension Plans Obligations 388
Value of Equity 11,132
Shares Outstanding 148.6
Intrinsic Value of Stock 74.91$
Fraction of Year Elapsed 0.8685
Adjusted Stock Price as of Today 80.40$
Fiscal Years Ending 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024CV
EP Model
Beginning Invested Capital 9,952
Economic Profit (EP) 85 ‐53 275 213 253 347 367 418 475 520
Continuing Value (CV) 15,115
WACC 7.32%
EP to Discount 85 ‐53 275 213 253 347 367 418 475 15,115
Periods to Discount 1 2 3 4 5 6 7 8 9 9
Present Value of EP 79 ‐46 223 160 178 227 224 237 251 8,001
Beginning Invested Capital 9,952
Value of Operating Assets 19,487
Add: Excess Cash 0
Add: Other Non Current Assets 421
Less: Current Portion of Debt 301
Less: Long Term Debt 7,248
Less: PV of Operating Leases 436
Less: PV of Employees Stock Options 58
Less: Environmental Contingencies 345
Less: PV of Pension Plans Obligations 388
Value of Equity 11,132
Shares Outstanding 149
Intrinsic Value of Stock 74.91$
Fraction of Year Elapsed 0.8685
Adjusted Stock Price as of Today 80.40$
Today 11/13/2015
Next FYE 12/31/2015
Last FYE 12/31/2014
Days in FY 365.00
Days to FYE 317.00
Elapsed Fraction 0.8685
Eastman Chemical Company
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
EPS 3.24$ 3.48$ 3.72$ 3.98$ 4.24$ 4.44$ 4.65$ 4.86$ 5.08$ 5.30$
Key Assumptions CV growth 5.00%
CV ROE 20.86%
Cost of Equity 10.18%
Dividend yield 1.70%
Future Cash Flows P/E Multiple (CV Year) 14.14
EPS (CV Year) 5.30
Future Stock Price $74.91
Dividends Per Share $1.45 $1.46 $1.46 $1.47 $1.47 $1.56 $1.64 $1.73 $1.79 $1.83
Periods to discount 1 2 3 4 5 6 7 8 9 9
Discounted Cash Flows $1.32 $1.20 $1.09 $1.00 $0.91 $0.87 $0.83 $0.79 $0.75 $31.29
Intrinsic Value 40.06$
Fraction of year elapsed 0.8685
Adjusted stock price as of today 42.99$
Eastman Chemical Company
Relative Valuation Models
EPS EPS Est. 5yr
Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16
ASH Ashland Inc. 109.20$ $ 7.55 $ 8.54 14.46 12.79 14.30 1.01 0.89
CE Celanese Corp. 70.20$ $ 6.04 $ 6.36 11.62 11.04 8.15 1.43 1.35
DOW Dow Chemical Company 51.14$ $ 3.28 $ 3.51 15.59 14.57 8.10 1.92 1.80
DD E. I. du Pont de Nemours and Company 67.05$ $ 2.76 $ 3.28 24.29 20.44 2.07 11.74 9.88
HUN Huntsman Corp. 12.41$ $ 1.88 $ 2.16 6.60 5.75 7.00 0.94 0.82
Average 14.51 12.92 3.41 2.95
EMN Eastman Chemical Company 68.60$ $ 3.24 $ 3.48 13.90 19.73 6.85 2.03 2.88
Implied Value:
Relative P/E (EPS15) $ 47.01
Relative P/E (EPS16) 44.92$
PEG Ratio (EPS15) 75.62$
PEG Ratio (EPS16) 70.24$
Eastman Chemical Company
Key Management Ratios
Fiscal Years Ending Dec. 31 Formula 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV
Liquidity RatiosCurrent Ratio Current asset/ Current liabilities 2.066 1.902 1.932 1.569 1.661 1.781 1.630 1.970 2.037 1.930 2.210 1.994 2.446 2.319
Quick Ratio (Cash and cash equivalents+A/R+Other receivables)/Current liabilities 0.180 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Cash Ratio Cash and cash equivalents/Current liabilities 0.518 0.183 0.161 0.106 0.204 0.113 0.537 0.426 0.540 0.718 0.706 0.807 0.769 0.835
Activity or Asset‐Management RatiosTotal Asset Turnover Revenue/Total assets 1.161 0.697 0.789 0.593 0.617 0.655 0.632 0.689 0.708 0.702 0.750 0.745 0.816 0.828
Inventory Turnover Revenue/Inventory 7.694 5.866 4.866 4.945 4.818 4.950 4.950 4.950 4.950 4.939 4.939 4.939 4.939 4.939
Receivable Turnover Revenue/Average account receivable 15.776 15.732 14.701 12.408 11.519 10.930 10.825 10.735 10.700 10.659 10.629 10.609 10.600 10.600
Financial Leverage RatiosDebt Ratio Total debt/Total assets 0.703 0.767 0.660 0.817 0.765 0.757 0.773 0.757 0.754 0.760 0.752 0.764 0.755 0.762
Debt to Equity Ratio Total debt/Total equity 2.286 2.945 2.017 3.658 3.259 3.122 3.401 3.115 3.070 3.165 3.037 3.240 3.075 3.206
Interest Coverage Ratio EBIT/Interest expense 11.592 4.538 9.328 5.294 2.013 2.206 2.412 2.631 2.863 3.064 3.275 3.498 3.731 3.977
Profitability RatiosGross Profit Margin Net income/Revenue 21.858% 21.748% 29.690% 23.313% 22.299% 22.322% 22.345% 22.367% 22.390% 22.390% 22.390% 22.390% 22.390% 22.390%
Operating Margin Income from operations/Revenue 13.054% 9.874% 19.914% 12.197% 11.249% 11.337% 11.424% 11.510% 11.596% 11.606% 11.617% 11.627% 11.637% 11.647%
Return on Asset (ROA) Net income/Total assets 10.301% 3.761% 9.835% 4.660% 3.014% 3.322% 3.318% 3.736% 3.956% 3.995% 4.341% 4.380% 4.868% 5.011%
Return on Equity (ROE) Net income/Total equity 33.509% 14.432% 30.065% 20.864% 12.836% 13.695% 14.602% 15.375% 16.103% 16.636% 17.526% 18.569% 19.837% 21.079%
Payout Policy RatiosDividend Payout Ratio DPS/EPS 94.018% 72.921% 165.714% 31.024% 21.712% 35.959% 16.358% 28.768% 44.881% 41.921% 39.276% 36.900% 34.762% 35.132%
Present Value of Operating Lease Obligations (2004) Present Value of Operating Lease Obligations (2005) Present Value of Operating Lease Obligations (2006)
Operating Operating Operating
Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 64.2222077765347 Leases
2005 43 2006 44 2007 45
2006 34 2007 36 2008 30
2007 26 2008 23 2009 25
2008 15 2009 19 2010 20
2009 13 2010 16 2011 17
Thereafter 52 Thereafter 70 Thereafter 64
Total Minimum Payments 183 Total Minimum Payments 208 Total Minimum Payments 201
Less: Interest ‐77 Less: Interest ‐124 Less: Interest ‐88
PV of Minimum Payments 260 PV of Minimum Payments 332 PV of Minimum Payments 289
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08%
Number Years Implied by Year 6 Payment 4.0 Number Years Implied by Year 6 Payment 4.4 Number Years Implied by Year 6 Payment 3.8
Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 43 40.9 1 44 41.9 1 45 42.8
2 34 30.8 2 36 32.6 2 30 27.2
3 26 22.4 3 23 19.8 3 25 21.5
4 15 12.3 4 19 15.6 4 20 16.4
5 13 10.1 5 16 12.5 5 17 13.3
6 & beyond 52 143.7 6 & beyond 70 209.6 6 & beyond 64 167.4
PV of Minimum Payments 260.2 PV of Minimum Payments 332.0 PV of Minimum Payments 288.6
Present Value of Operating Lease Obligations (2007) Present Value of Operating Lease Obligations (2008) Present Value of Operating Lease Obligations (2009) Present Value of Operating Lease Obligations (2010)
Operating Operating Operating Operating
Fiscal Years Ending 160.609316715172 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 64.2222077765347 Leases Fiscal Years Ending 160.609316715172 Leases
2008 32 2009 30 2010 25 2011 24
2009 26 2010 26 2011 25 2012 24
2010 22 2011 22 2012 17 2013 13
2011 20 2012 14 2013 12 2014 6
2012 12 2013 9 2014 10 2015 4
Thereafter 65 Thereafter 14 Thereafter 15 Thereafter 15
Total Minimum Payments 177 Total Minimum Payments 115 Total Minimum Payments 104 Total Minimum Payments 86
Less: Interest ‐157 Less: Interest 9 Less: Interest 9 Less: Interest ‐17
PV of Minimum Payments 334 PV of Minimum Payments 106 PV of Minimum Payments 95 PV of Minimum Payments 103
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08%
Number Years Implied by Year 6 Payment 5.4 Number Years Implied by Year 6 Payment 1.6 Number Years Implied by Year 6 Payment 1.5 Number Years Implied by Year 6 Payment 3.8
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 32 30.5 1 30 28.5 1 25 23.8 1 24 22.8
2 26 23.5 2 26 23.5 2 25 22.6 2 24 21.7
3 22 19.0 3 22 19.0 3 17 14.7 3 13 11.2
4 20 16.4 4 14 11.5 4 12 9.8 4 6 4.9
5 12 9.4 5 9 7.0 5 10 7.8 5 4 3.1
6 & beyond 65 235.1 6 & beyond 14 16.0 6 & beyond 15 16.5 6 & beyond 15 39.1
PV of Minimum Payments 333.8 PV of Minimum Payments 105.5 PV of Minimum Payments 95.2 PV of Minimum Payments 102.9
Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2014)
Operating Operating Operating Operating
Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 64.2222077765347 Leases Fiscal Years Ending 160.609316715172 Leases Fiscal Years Ending Dec. 31 Leases
2012 27 2013 47 2014 44 2015 71
2013 20 2014 34 2015 38 2016 57
2014 11 2015 27 2016 35 2017 43
2015 8 2016 23 2017 24 2018 32
2016 7 2017 21 2018 15 2019 21
Thereafter 32 Thereafter 55 Thereafter 54 Thereafter 85
Total Minimum Payments 105 Total Minimum Payments 207 Total Minimum Payments 210 Total Minimum Payments 309
Less: Interest ‐60 Less: Interest ‐30 Less: Interest ‐63 Less: Interest ‐127
PV of Minimum Payments 165 PV of Minimum Payments 237 PV of Minimum Payments 273 PV of Minimum Payments 436
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08%
Number Years Implied by Year 6 Payment 4.6 Number Years Implied by Year 6 Payment 2.6 Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 Payment 4.0
Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 27 25.7 1 47 44.7 1 44 41.9 1 71 67.6
2 20 18.1 2 34 30.8 2 38 34.4 2 57 51.6
3 11 9.5 3 27 23.3 3 35 30.2 3 43 37.1
4 8 6.6 4 23 18.9 4 24 19.7 4 32 26.2
5 7 5.5 5 21 16.4 5 15 11.7 5 21 16.4
6 & beyond 32 99.7 6 & beyond 55 102.9 6 & beyond 54 135.6 6 & beyond 85 237.3
PV of Minimum Payments 165.0 PV of Minimum Payments 236.9 PV of Minimum Payments 273.4 PV of Minimum Payments 436.2