EFTA01447955.pdf

Deutsche Bank Markets Research Elating ..,. :`ipso, Date 29 July 2014 Buy Eastman Chemical Results North America United States ..n Price at 29 Jul 2014 (USD{ 81.57 Industrials EMIUN EMN UN NYS EMN Price target 100.00 Chemicals / Specialty 52-week range 90.20- 72.67 Share Price Decline Unwarranted David (ineiertei Research Analyst IS C , Nleof 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 iLirr,sluo; guidance as investors focused on i) new '15 guidance of $7.50-$8.00 (vs $8 Research Associate 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 Research Associate 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 IThicarpoce relative (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 105 outage, consensus was $1.88. A lower than expected tax rate added $0.01. SO 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 eo aer tii:#411:*°:e. added 1°!.. EBIT fell 3% to $441MM while margins compressed 70bps YoY as soi ree (+130 000) to 17.9% on higher propane costs. Eastman repurchased $100MM am VIZ en2 2n3 603 au of stock in 02 and has $640MM left under its $16 authorization. Eastman Eereouro0•11.10.1 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' ino '155 EPS by SO OS to $7.70 S&P 00011100. Crlebased) Notwithstanding a solid Q2 release, Eastman shares fell 8% due to concerns Performance I%) lm 3m 12m over lowered '15 EPS and '14 Fibers guidance. Another driver, in our view, was Absolute .67 -5.4 8.6 the wide $0.30 guidance range for 2H14 as it implies a high degree of volatility S&P 600 INDEX 0.6 4.9 16.9 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 Source Doreen Sone EPS for Eastman due to destocking in Fibers, a slowdown in heat transfer Target price of-ST00 fluids (China) and a planned outage at the company's largest ethylene cracker Our $100 target price is based on in Longview, TX ($20MM, or $0.10 impact in Q4). Looking ahead to '15, we Eastman trading at 13x '15E EPS in believe Fiber earnings will recover modestly post destocking and lower plant 12mos, a 12% discount to its operating rates in '14. While we concur with Eastman's view that Fiber differentiated chemical peer Dow. Risks: earnings are plateauing, we believe EBIT will be higher in '15 at -$500MM vs weaker tire demand, the depressed level of $480MM in '14. And with EBITDA of $550MM and increased leverage and the Solutia capex of just $50MM. Fibers should be strong source of cash to fund growth integration. (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 (outages/turnarounds: $0.20), lower propane costs ($0.15-$0.20). acquisitions ($0.10-plus), base business growth ($0.35) and share buybacks ($0.20). To reflect lower Fibers earnings, we are trimming our '14E EPS by $0.05 to $6.90, up 7% and our '15E by $0.05 to $7.70 up 12%. Year End Dec 31 20I3A 2014E 2015E FY EPS (USD) 6.44 6.90 7.70 Sour. Des... Sank anymore' rcropero dere Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0102752 CONFIDENTIAL SDNY_GM_00248936 EFTA01447955