At $110, Eastman Chemical Stock Is Too Pricey

After a more than 175% rally since the March 23 lows of the last year, at the current price of around $110 per share, we believe Eastman Chemical Stock (NYSE: EMN) is overpriced. Eastman Chemical, a chemical company that manufactures and markets chemicals, fibers, and plastics, has seen its stock rally from $38 to $109 off the recent March bottom compared to the S&P which moved around 75%. The stock is leading the broader markets by a huge margin and is currently trading 44% higher than its pre-Covid peak. That said, there is a mismatch between its stock movement and revenue growth – Eastman Chemical’s top-line has fallen 9% to a consolidated figure of $8.5 billion for the last 4 quarters from the consolidated figure of $9.3 billion for the 4 quarters before that. However, the company has reported better than expected revenues and earnings in each of the last three quarters. Further, it has seen improvement in demand and sales volume in the second half of 2020, which is the main reason behind positive investor sentiment toward EMN stock.

Eastman Chemical’s stock has surpassed the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. This seems to make it expensive as, in reality, demand and revenues will likely be lower than the pre-Covid levels.

The company’s revenues fell around 17% from $10.2 billion in 2018 to about $8.5 billion in 2020, which translated into a 56% drop in the net income figure. The unusual decrease in net income was mainly due to higher costs resulting from lower capacity utilization and expenses related to inventory reduction as a result of the Covid-19 crisis.

While the company has seen negative growth in revenue and earnings over 2018-2020, its P/E multiple has increased. We believe the stock is overpriced and is likely to see some downside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard Buy Or Fear Eastman Chemical Stock? has the underlying numbers.

Eastman Chemical’s P/E multiple has changed from just below 10x in FY 2018 to around 28x in FY 2020. While the company’s P/E is close to 31x now, there is a downside risk when the current P/E is compared to levels seen in the past years – P/E multiple of around 28x at the end of 2020 and 14x at the end of 2019.

So Where Is The Stock Headed?

Eastman Chemical’s revenues for 2020 have decreased by 9% y-o-y, primarily due to lower demand for some products and a drop in selling prices driven by a decline in raw material costs. Businesses have suffered heavy losses in the year due to the Covid-19 crisis and the economic slowdown. This has negatively affected the demand for EMN’s products in certain industries like transportation, building, and construction, consumer durables, textiles end markets, etc. While the company has seen some improvement in demand over the second half of 2020, recovery to the pre-Covid level is likely to be more gradual than immediate. Hence, the stock rally over the recent quarters is not sustainable. Overall, Eastman Chemical’s revenues in the subsequent quarters are likely to see stagnant growth, providing a reality check to the investors and reducing Eastman Chemical’s stock price in the near term.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

While Eastman Chemical Stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Macquarie Infrastructure Corporation vs. PulteGroup shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams