Materials Eastman Chemical April 19, 2016

Krause Fund Research
Materials | Spring 2016
Eastman Chemical (NYSE: EMN)
Materials
April 19, 2016
Recommendation: SELL
Analysts
Jack Warning
[email protected]
Current Price
Target Price
Jace Hepker
[email protected]
Tom Murray
[email protected]
Investment Thesis
Company Overview
Eastman Chemical (EMN) is a diversified chemical company
with a strong hold on the global market share. Eastman
manufactures and sells intermediary products as well as final
market chemical products. The diverse company has five
company segments: additives & functional products,
adhesives & plasticizers, advanced materials, fibers, and
specialty fluids & intermediaries. Some specific products
Eastman produces are tire coatings, amines for crop
protection, adhesive resins, specialty plastics, performance
films, acetate products, chemical intermediates, and
functional amines. Eastman Chemical is a leader in
sustainability shown by the 2016 Partner of the Year award
given to Eastman by the U.S. Environmental Protection
Agency (EPA). For the fiscal years ended 12/3/15, total
revenues rose 0.99% to $9.648 million16.
Stock Performance Highlights
52-week High
52-week Low
Beta Value
Average Daily Volume
$83.90
$56.03
1.55
l.407 m
Share Highlights
Market Capitalization
Shares Outstanding
Book Value per share
EPS (as of 12/31/2015)
P/E Ratio
Dividend Yield
Dividend Payout Ratio
$10.95 b
147.94 m
$2.79
$5.66
13.08
2.55%
22.80%
• Eastman Chemical has a strong global presence, using the
innovative products to attract emerging markets.
• Even though Eastman Chemical is global, their revenues
are largely dependent from the United States (43.7% of sales)
which may cause turbulence in future earnings if the U.S.
economy drops
• Eastman Chemical has effectively expanded into key
geographical areas while gaining market share by aggressively
completing mergers and acquisitions
• The company’s segments are going through innovative
change, focusing more towards specialty chemicals due to
higher demand and profit margin
• Eastman Chemical has a D/E ratio of 175.80 making it the
most leveraged among competitors. If the recent acquisitions
completed do not lead to profits in the near term EMN will face
negative earnings
• The benefit of low oil prices has been offset by the
pressure of incoming competitors. EMN will have to continue
to lower selling prices
One Year Stock Performance (as of April 19, 2016)
Company Performance Highlights
ROA
ROE
Sales
3.69%
22.44%
$9.65 b
Financial Ratios
Current Ratio
Debt to Equity
$76.72
$63-73
1.40
175.8
Important disclosures appear on the last page of this report.
Executive Summary
At the present time, we are giving Eastman Chemical
Company a SELL rating. Eastman Chemicals, along with
the entire Chemical sector, has continuously
underperformed the S&P 500 throughout the past 5+
years. Eastman has recently made efforts to expand
and innovate through acquiring new companies and
creating more efficient inputs to cut costs, however,
we believe the pressure of the economy, supply
surplus, and diminishing demand for some of
Eastman’s products does not fit a profitable short or
long-term investment horizon. We also believe that
the weakening foreign economies, specifically Asian
Pacific, are a large driver behind the decrease in
revenues leading to Eastman’s lower guidance for
2016. Overall, we recommend selling Eastman
Chemical Company and allocating the investment to a
more opportunity to compete with the market.
Economic Outlook
Interest Rates
6mo
1yr
2-3yr
0.25-0.50%
0.50-0.75%
0.75-1.50%
1.5-3.0%
The recent lack of demand and excess supply of oil has
led oil prices (WTI) to decrease by 35.29% over the past
year as of April 18th, 20165. Lower oil prices often
indicate a drop in global economic activity and
negatively impact companies in the materials sector
due to uncertainty.
The above chart shows the correlation between EMN
and crude prices over the past 12 months. EMN saw a
decrease or partial decrease in revenue across all
segments due to lower raw material and energy costs
exceeding lower selling prices by an undisclosed total
amount6. EMN uses a hedging strategy to decrease
volatility among input costs; however, the hedges only
partially offset the lost revenue.
Interest rates play a major role in the direction of the
economy and lower rates are typically positive for the
overall stock market. Currently, the Fed’s influence on
interest rates has been positive for the EMN and the
economy, however, our long-term view differs greatly.
Current
Oil and Energy Prices
Source: Yahoo Finance
To predict the movement of the economy, we have
come up with five indicators. These indicators include:
interest rates, oil and energy prices, construction
spending, exchange rates, and government regulation.
Fed Funds
Rate
further increase EMN’s debt load and may negatively
affect earnings with the large increase in interest
expense.
1
The average 10 Year Real Interest Rate is 1.46% and as
of April 15th the current rate is a mere 0.20%2. In the
short term we assume that the Fed will continue to be
hesitant towards raising rates due to the uncertainty
about global growth, which will also have coincided
with the yield curve rising back near 10-year average
levels. In the long term we believe markets will stabilize
allowing interest rates to rise, in turn negatively
impacting EMN. Eastman’s Debt to Equity ratio is
175.80 compared to the industry average of 60.3 3. On
top of being heavily leveraged, EMN’s growth strategy
includes large acquisitions such as the recent Tamico
deal in December of 2014, which increased EMN’s debt
by 1 billion 4. Continuing this growth strategy will
In the short term (6-12mo) we believe crude will trade
in the $38-$50 per barrel range. In the long term (23yrs) we believe global economic activity will pick up
and global oil producers will come to an agreement to
reduce supply allowing crude to rise further toward
$55-$70 a barrel. The rise of oil prices will positively
affect EMN by allowing them to reach profitable selling
prices despite higher energy costs as opposed to
reducing selling prices to match competitors in times of
cheap resources.
Exchange Rates
Companies with a large international presence face the
daily risk of fluctuating currencies. Any assets held
overseas must be reported in U.S. dollars (for U.S. based
companies) despite overseas assets being denominated
in local currencies. This can cause a company to lose or
save millions in potential profits. The strong U.S. dollar
has negatively impacted EMN because more than 50%
1
of its locations (sales, manufacturing, and technical
services) operate internationally. As of April 20th, 2014
the USD has strengthened against every major currency
including the EUR (18.09%), JPY (6.26%), and GBP
(14.95%)7. When EMN reports its financials the assets
from international countries must be converted into the
more expensive USD, which leaves the company with an
unfavorable shift in foreign currency exchange rates. In
a 6-12mo horizon we believe the USD will remain strong
compared to major currencies such as the Euro and
Japanese Yen. In 2-3yrs we see the dollar devaluing as
China and other global markets stabilize. Our given
forecast would positively affect EMN and the company
will most likely see profits from foreign exchange rates
rather than large costs such as the $8 million loss in
20158.
Producer Price Index
The PPI shows trends within the manufacturing
industries and commodities markets. It is a measure of
average prices producers are receiving for their goods
and services, which in turn can help predict the CPI and
inflation. In times of global turmoil the PPI will illustrate
a negative M/M or Y/Y change in the PPI. As of April 4th,
2016 the PPI-FD missed the consensus range of 0.0%0.4% with an actual change of -0.1%, which is also the
Y/Y change9. The recent increase in oil prices has
positively affected the PPI however slow global
economic activity has offset those affects. The majority
of EMN’s manufacturing and production consists of raw
materials and commodities so tracking the PPI allows
investors to predict how much selling power EMN has
over their finished or intermediate goods.
EMN also focuses highly on environmental regulations.
The EPA has made EMN and other chemical companies
liable for any such clean up costs where pollution may
occur, which could drastically affect a company’s
appearance and stock price in the event of a chemical
spill. Estimated future environment remediation costs
ranged from $308 to $516 million to be paid over 30
years8. However, in relation to energy consumption, the
EPA has recognized EMN as the Energy Star Partner of
the Year in Sustained Excellence for the fifth year in a
row.
Capital Markets Outlook
In the short-term, we feel that the materials market will
underperform due to a strong U.S. dollar hurting
exports. Additionally, with China’s currency weakening,
the demand for raw materials will decrease
accompanied by an already lingering surplus. With
suppressed commodities prices, and lower sales prices
due to the strong dollar, we believe the biggest
challenge faced in the long-term will be how and when
these commodities prices will rise. However, an area of
interest for investment is in chemical companies.
Chemical companies have the opportunity to benefit
given the low energy prices that they use in the firm's
products20. Other than chemical companies, we do not
find strong interest in any other sub sector at this time
since the low commodity prices create trouble for
growth in the firms.
Government Regulation
Government Regulation has a huge impact on how
companies in the Materials sector operate. The
availability of raw materials is subject to the country’s
government regulation in which it operates. In times of
imbalance such as the excess oil supply, government
regulation can interfere with a company’s normal
operations by forcing a reduction or increase in output.
Times of war, hostilities, terrorism, breakdown or the
degradation of transportation infrastructure also lead to
an interference with operations8. Chemical companies
are subject to very close regulation because they are
one of the largest targets for terrorist attacks. An attack
could either supply chemicals to terrorist for later
weapon usage or lead to a chemical spill possibly
affecting the surrounding population
Source: Yahoo Finance
Industry Analysis
Industry Overview
Companies operating in the Diversified Chemicals
market produce a variety of chemical products and
industrial gases. These companies are involved in 2 or
2
more of the following categories of the Chemical
Industry: Commodity Chemicals, Fertilizers and
Agricultural Chemicals, Industrial Gasses, or Specialty
Chemicals10. The majority of these products are used as
raw materials by manufacturing companies and reach
end markets such as automotive, residential, and
commercial construction11.
2)
Developments and Industry Trends
The broader Chemicals industry has been down -16.24%
over the past year compared to the S&P 500’s -9.89%21.
Key indicators of the Diversified Chemicals industry are
geographic regions, strength of economy,
manufacturing economy, and input costs. Operating
throughout different regions domestically and
internationally provides a diversified stream of income.
Diversified Chemicals have less pricing power than
Specialty Chemicals because they are they are
dependent upon the demand of commodities11. The
industry will correlate strongly with U.S. and emerging
markets, both of which have been on a downward
trend. We believe that developing markets pose huge
opportunity for rapid expansion partly due to the
mature automotive and housing industry in the United
States. China is the largest consumer of commodities,
however, with suppressed demand from China, we have
seen commodity prices drop significantly over the past
year, directly affecting the revenues of companies
within the industry. U.S. data has shown an increase in
construction spending, both residential and nonresidential, in 2015, and we see this continuing into
2016 while interest rates remain relatively low. In the
near-term, we believe emerging markets will continue
to grow at a slow pace, but we expect it to regain steam
in late 2017 as China plans to turn Beijing into a mega
city with the population near the size of Japan13, thus
pushing up demand of commodities.
Porter’s Five Forces11
1) Threat of New Entrants: Due to the high government
regulations and plethora of patents, the threat for
new entrants is low. Also, the current focus of
research new entrants requires specialized
knowledge forcing the entrants to spend a lot of
time researching and developing products. This large
amount of time required gives a supple amount of
time for companies to prepare. Along the same lines
the research and development requires a large
3)
4)
5)
capital requirement forcing new entrants to borrow
heavily. With the current threat of increasing interest
rates borrowing becomes more expensive, making
an entrance less probable.
Supplier Power: Suppliers in the diversified
chemicals industry has moderate to high power. The
producers have limited substitutes so a sudden drop
of material or change in price could be drastic. Also,
since many competitors in the industry need unique
products, suppliers with unique products could
change the costs causing a large drop in margin.
Threat of Substitutes: The threat of substitutes in
this industry is fairly low. The demand of specific
chemical products is not going to change because
the chemical products are input/intermediary
products in many other companies’ products. Also
when a new chemical comes out, the industry
already recognizes the product and adapts to make
changes.
Buyer Power: The buying power that the diversified
chemical industry has is moderate. The industry’s
chemicals are needed inputs for many industries
making demand steady. But, the industry is mostly
dependent on long term contracts, preventing the
companies to adjust returns dependent on the
growth of the economy. There are also multiple
customers in this industry, not just one, providing
power to the companies for the plenty selling
opportunities.
Industry Rivalry: The diversified chemicals rivalry is
very high due to the similarity of competitive
products. In order to gain a competitive advantage,
the companies within the sector need to gain as
much market share as possible. But, most companies
are already global therefore causing expansion to
become more difficult. The main driver of rivalry is
the domestic consumption of the products. The
lower the price the higher the demand.
Best Positioned Competitors
Firms that are largely diversified have the biggest
advantage – oil being a big input on some chemicals.
Some diversified chemical companies are hurting by the
crash of crude oil but special Chemicals and agricultural
Chemicals are performance driven and specific to
customer specifications so they have the opportunity to
become the price maker rather than depending on
3
commodity prices. Many diversified chemicals counter
by having commodity related operations along with
special chemical operations.11
a momentous future outlook due to manufacturing
expansion in Malaysia that focuses heavily with AFP
segment chemicals.
Firms that are changing to innovative solutions rather
than discoveries are becoming leaders of the industry.
Since global expansion is widely used already, firms that
are not global are followers and need to expand in order
to gain market share. Firms that have more focus on
environmental sustainability products are leaders given
the mega trend14. Also, expanding facilities and the
acquiring of other companies improve the market share
of producers (leaders).
Adhesives & Plasticizers (AP)
Different than the AFP segment, the AP segment
focuses more on intermediary chemicals for business to
business relationships. Some products within the AP
segment include Piccotac, Regalite, Eastotac, Eastoflex,
Eastman 168, Eastman DOP, Benzoflex, Eastman TXIB,
and Effusion8. With these intermediary chemical
products, the AP segment relies heavily with previous
customer relationships. The AP segment in 2015
brought in $1.2 billion in revenues, representing 12% of
Eastman’s sales8. In the future, it seems Eastman will
expand its manufacturing capacity due to the increasing
demand of Eastman’s intermediary chemicals.
Company Analysis
Eastman Chemical Company is a chemical company
that produces a diverse range of materials, chemicals,
and fibers that are used in a variety of ways. Eastman
is a global company that has 51 manufacturing sites,
several sales offices, and is headquartered in
Kingsport, Tennessee8. The company structure consists
of 5 business segments:
Business Segments
Source: Eastman 2015 10K
Source: Eastman 2015 10K
Additives & Functional Products (AFP)
The AFP segment of Eastman has continuously
innovated the production of coatings, tires,
consumables, animal nutrition, crop protection, and
energy8. AFP sales in 2015 were $2.4 billion claiming
25% of Eastman’s total revenues8. The AFP segment of
Eastman is highly dependent on the level of overall
demand within the economy. The AFP segment has
been consistently growing in the positive direction with
Advanced Materials (AM)
One of three leading revenue segments, the AM
segment is competitive even with the strong market
presence Eastman has with its products. The AM
segment contains polymers, specialty plastics,
interlayers, and performance films. These products
brought in $2.4 billion in sales revenue in 2015 (25% of
total sales)8. However, causing an opportunity for
higher profits, Eastman plans to step away from low
profit margin products in the upcoming years7. The
increase in demand for BPA-free products has
encouraged Eastman to pursue this route even further.
Given the uncertain economic strength of the economy,
this strategic move for the AM segment will bring in
sufficient higher volatility for the years to come.
4
Fibers (F)
Eastman, in the Fibers segment, manufactures
chemicals for cigarette filters, apparel, home
furnishings, and industrial fabrics. Throughout the
world, Eastman is the largest producer and market
leader for chemical products Acetate Tow, Acetate Yarn,
and Acetyl. Eastman’s leading Acetate production has
brought in $1.2 billion in sales revenue for 2015 (13% of
total sales)8. The Fibers segment, that’s been in business
for 75 years demonstrates a strong, competitive
advantage Eastman has with Acetate chemicals.
However, Acetate chemicals is dependent on general
market health and specifically the growth of China’s
economy16. With a volatile U.S market and weakened
China economy, Acetate chemicals have faced tough
market conditions. With the struggling economy and
weak demand in the Europe, Eastman was forced to
shut down one of their Acetate factories in the United
Kingdom7.
Specialty Fluids & Intermediates (SFI)
The SFI segment has been successful due to the
competitive cost structure of its products. The SFI
segment is able to sell at competitive prices due to its
access to lower costs of raw materials (mostly natural
gas). The products within the SFI segment includes oxo
alcohols, acetic acid, ethylene, polymers, alkylamines,
Therminol, Eastman Turbo Oils, Skydrol, and Eastman
SkyKleen16. SFI is a very cyclical segment due to supply
and demand imbalances. However, SFI historically still
tends to be one of the top revenue producers for
Eastman; in 2015 SFI brought in $2.4 billion (25% of
total sales)8. Eastman has shown an increase in focus to
expand the SFI segment by expanding manufacturing
facilities in Newport, Wales. Overall, Eastman’s plans for
a potential of higher profits with the increase in
demand due to Eastman’s recent shift in specialty fluids
focus excites our investment recommendation.
Corporate Strategy
Eastman is a company that strives for a global presence,
high sustainability standards, and synergistic growth
through mergers & acquisitions.
Global Presence
It is evident that Eastman will continue to grow outside
of the United States, further diversifying their risk. In
fact, Eastman has 51 manufacturing sites and 15 joint
ventures15 across the world, showing a strong foothold
in the competitive, global chemical market. We believe
that Eastman’s strong, global presence is a strong
competitive advantage compared to other competing
firms. Here is a picture demonstrating the real estate
Eastman owns throughout the world:
Source: Eastman.com
Sustainability
Eastman has appealed to its customers with its strong
sustainability record. With the current sustainable
mega trend and government regulations hitting the
chemical companies, Eastman effectively acts on this
short term competitive advantage through its ecofriendly products and operations. Eastman’s priority
with sustainability has been rewarded with Eastman
receiving the Energy Star Partner of the Year –
Sustained Excellence Award for the 4th consecutive
year (awarded by the Environmental Protection
Agency)17. In order to achieve stronger profits and
larger global market share, Eastman has to continue to
manage a sustainable practice.
Mergers & Acquisitions
Eastman constantly looks for profitable, cost reducing
opportunities to acquire or merge with a company
with significant market share. With the 2012
acquisition of Solutia and the 2014 acquisition of
Taminco, Eastman shows a persistence to acquire
more market share through M&A activity8. With the
strategy to expand into other facilities, Eastman has
been able to reduce its costs. We believe Eastman will
continue to be searching for the next M&A within the
next five years in order to gain more market share until
reaching their CV year.
Life Cycle
Eastman Chemicals is a very cyclical company. Eastman
tends to see higher profits and earnings in the second
and third quarters due to the higher economic activity.
The overall company is in the market development or
growth stage of their life cycle. This can be shown due
5
to the recent acquisitions of Taminco in 2014 (a global
specialty company), and Solutia in 2012 (a global leader
in performance materials and specialty chemicals)8. We
believe that growth is crucial for Eastman to compete
with its large cap competitors; however, we do not see
these acquisitions producing a valuable return on
investment until much further down the road.
Eastman’s cash flow and income statement show a
large negative cash flow from investing activities and a
large increase in long-term debt in compared to recent
years8. This worries us due to Eastman’s large debt to
equity ratio of 1.75 compared to competitors whom
average at 1.1420. With excess cash on hand, they
decided to take on more debt rather than stabilize and
reduce their debt to equity. With the economic
instability this is an issue for our recommendation.
Products Lines and Markets
sign given a decent year-end financial environment.
Eastman’s revenues of $2,225 million missed the
estimate and fell by 5% year over year. This was due to
the lower selling prices and large acquisitions of
Taminco and Commonwealth Laminating & Coating Inc.
Regarding the segments, AFP rose 11%, A&P fell 13%,
AM rose 4%, Fibers fell 15%, and SFI fell 17%. With
mixed signals many analysts rate Eastman as a hold. The
analysts expect Eastman to continue seeing challenges
in 2016 and even 2017 with the struggling global
economy. The weakening currencies and crude oil
slump further demonstrates a struggling outlook for
Eastman.
Production and Distribution
Eastman focuses primarily on creating efficiencies in the
production process. This has led to a large reduction in
cost and Eastman winning the 2015 Energy Star Partner
of the Year – Sustained Excellence award17. Because of
the current high market focus with production
efficiency relating to technology, Eastman has spent
sufficient capital on research and development in order
to take a competitive advantage in production
efficiency. Also, Eastman has distribution facilities at all
of their plant sites. Away from their plants, Eastman
owns or leases 200 distribution facilities. These facilities
are significantly located in the US but also in 30 other
countries12.
Competition
The above chart demonstrates the end markets for the
products in relation to the revenue of 2015. Please note
that there are many sub products within each product
line. Eastman is in a marketing growth strategy. The
importance of this stage is that Eastman is always
expanding segments, which is good for long-term
growth and stability; however, they are operating under
large R&D costs along with increasing debt.
der large R&D costs along with increasing debt.
Eastman’s direct competitors are mostly private
companies. Many public competitors deal with inputs
involving air gas, which is not directly related to
Eastman’s operations. Many competitors have
operations in the same regions as Eastman. For
example, most competitors have headquarters in the
U.S., offices across the globe, and production sites in
the Midwest and across the globe. As stated in the
production section, Eastman differentiates itself by
utilizing low cost production. In its competitive
environment, many companies receive similar prices for
raw materials (commodities) so they do not have to
compete much over input prices. The growth outlook
for competitors is similar to Eastman; Asia will be the
focus on many of the competitors’ expansion plans.
Eastman’s Recent Earnings and Guidance16
Research and Development8
Source: 2015 Eastman Annual Report
Eastman’s 2015 fourth quarter earnings report did not
show a positive outlook. Earnings per share for the 4th
quarter in 2015 were $1.59, down from $1.64 per share
in the 2014 4th quarter. Although Eastman did top the
analyst estimate of $1.55 the year drop is not a good
Eastman is faced with a strong growth initiative faced
by the chemicals market. Initiative towards new
products, more sustainable products, and most
importantly more efficient production technology has
6
separated the winners and the losers with the chemical
competitors. With technology in the chemical industry
exponentially improving, Eastman is placing high focus
in developing their internal technological operations to
improve productivity and processes. In 2015 Eastman
spent $251 million, a $24 million increase (11%) from
2014’s R&D expense of $227 million. Other competitors
like Celanese Corporation (CE) increased their research
and development expenditures by 28% therefore shows
the significant surge in research expenditures for
chemical companies. Eastman looks to continue a large
growth in R&D to stay competitive and grow its
business.
Foreign Sales
Eastman’s sales significantly rely on the United States.
Here is a chart depicting the global sales picture8:
Government Regulation
There are new regulations on tire manufacturers to
create more fuel efficient tires. This regulation has
helped Eastman because the additives that Eastman
manufactures improve fuel efficiency on the tires. Also,
the regulations on supply of raw materials and energy
greatly impact the volatility of Eastman’s profits.
Regarding the sustainability trend, a committee under
the Board of Directors is in charge of the sustainability
and eco-friendly process of production, waste, and
storage. Eastman has won numerous sustainability
awards resulting in a positive image for investors.
Personnel and Key Management
The Chairman and CEO of Eastman Chemical company is
Mark J. Costa, age 4919. Mr. Costa has been the CEO
since only 2014 due to the previous CEO retiring. Costa
was Eastman’s Senior VP of Strategy, Marketing and
Business Development and was also in control of the
Specialty Chemical division before his time as CEO. Mr.
Costa has a total calculated compensation of almost
$9.877 million and he has already exercised $4 million
worth of options19. Our team’s opinion on Mark J. Costa
is positive due to Costa’s consistent compensation with
company performance and re-engineering the growth
initiative. Although he has already exercised his stock
options we believe Costa will be a long-term CEO
providing Eastman with stable leadership and better
opportunity to grow.
Major Stock Holders20
Source: 2015 Eastman Annual Report
Comparing the sales from 2014 to 20158:
 Sales in the US and Canada fell by 0.78%
 Sales in Asia Pacific fell by 9%
 Sales in Europe, Middle East, and Africa
increased by 13.6%
 Sales in Latin America increased by 6.05%
This shows a mixed growth in sales, but the decrease in
Asia Pacific sales worries our team. As a whole, sales
were greatly affected by the lower selling prices of
Eastman’s products resulting from low cost inputs of
raw material and energy costs. Although North America
is where the majority of sales reside, Asia Pacific is
where Eastman’s growth should reside. So despite
turbulence among Asia Pacific economies, decreasing
sales is a red flag for our investment team.
Eastman does not consist of insiders owning a large
share of the company. According to Yahoo Finance, the
% of shares held by all insiders and 5% owners is 1% of
the total shares. This can raise some question on the
executives’ confidence of the company. The vast
majority of major stock holders belong to institutions
whom claim 88% of the stock. There is no indication
that the company will buy back its stock any time soon.
Source: Yahoo Finance
7
Catalysts for Growth/Change
The catalyst for Eastman Chemical’s growth will be
economic expansion among the U.S. and emerging
markets. Urbanization in under developed countries will
spike demand among the inputs Eastman produces
leading to increased sales in Asia Pacific, Latin America,
and Europe/Africa. Another catalyst is production
efficiency. Eastman is already the leader in production
efficiency and with the rise of technology Eastman will
potentially discover better solutions and mixes to
further increase productivity. This is a huge competitive
advantage for Eastman because the price of
commodities is volatile and all competitors are
dependent upon supply and demand. A catalyst for
market share growth is the rise of environmental
sustainability. It has been an increasing mega trend
(slowed down by extremely cheap energy currently) and
many businesses are partnering with companies that
have sustainability efforts in place, such as Eastman
Chemicals does.
Investment S.W.O.T. Analysis19
Strengths: Eastman has a strong diversification of
products. Their diverse product lines provide solutions
for diverse markets, resulting in a safe revenue stream
incase demand for one line weakens. Along with their
products, Eastman has many joint ventures in many
parts of the globe enhancing their portfolio further.
Eastman also has a leading market presence for a wide
variety of their chemicals (fibers specifically). Eastman’s
large market presence brings them a strong competitive
advantage.
Weaknesses: Eastman’s biggest weakness is their
largely dependent revenue stream coming from the
United States (43.7% of revenues). Although they do
have significant presence in other regions, the heavy
dependence on the US economy can affect the firm’s
revenues greatly.
Opportunities: Eastman has a strong focus on gaining
more strategic acquisitions providing them more room
to grow. Also, there is a mega-trend currently that
favors Eastman’s specialty chemicals market. By 2019
the US specialty chemicals market is forecasted to be
around $243.4 billion (a 16.8% increase from 2014).
Threats: The specialty chemicals market is becoming
increasingly competitive. BASF and Dow Chemical
Company are growing at a fast rate compared to
Eastman. Also, since Eastman relies heavily on the
demand of a strong financial market, the volatility with
the current market can drastically affect the revenue
stream. Lastly, with the eco-friendly mega-trend,
government regulations can easily threaten the
operations of Eastman.
Key Investment Positives19
 Global sales of chemicals have doubled over the
past decade – due to emerging markets (mostly
China)
 Exponential growth in technology will bring more
solutions to problems – 95% of companies surveyed
saw huge technological advances in the next 3 years
 Huge period of change – from discovery to solutions
for problems (restructuring business models)
 Positive construction outlook
Key Investment Negatives19
 Uncertain GDP growth and shifting market
dynamics offer challenges
 Low oil prices will continue to hurt the chemical
companies
 Some companies are over invested in specialty
chemicals
 A lot of competition for high growth economies
make it hard to gain customers
Valuation Summary
Valuation Summary
After in-depth research on Eastman Chemical, our
investment team has issued a SELL recommendation
with the belief that the stock price should be
significantly lower than the current price. We have
determined the intrinsic stock value using the
discounted cash flow (DCF) model, economic profit (EP)
model, dividend discount (DDM) model, relative
valuation P/E, and the relative valuation growth P/E.
Our model estimates the intrinsic value as of April 19th,
2016.
DCF and EP Valuation Models
Our DCF and EP valuation models gave us an adjusted
price as of today at $69.38. With the current price of
the stock at $76.72 our models show an overpriced
stock.
DDM Model
On the other hand, the DDM model gave us a target
price at $87.05 showing that the stock is undervalued,
however, we do not believe the DDM model portrays an
accurate price on our stock. We believe the dividends
within our scope will not be as high as forecasted due to
8
turbulence in the economy. Our overall prediction that
Eastman will face volatility will lead to slower growth of
dividends if even any growth. Overall, we believe that
the DDM valuation is not accurate due to Eastman’s
dividend growth.
Relative P/E Ratios Valuation
Our relative P/E model gave us an intrinsic value of
$99.19, signaling the stock to be undervalued. We
believe the model did not compute a reasonable price
and that is because our EPS is forecasted much lower
than the other competitors.
Overall, we believe the DCF and EP valuation model is
our most accurate and represented model for Eastman
Chemical. While taking in all the models, we have come
up with a target range of $63-$73.
Important Disclaimer
This report was created by students enrolled in the
Security Analysis (6F:112) 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 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.
9
Works Cited
1. “FOMC Meeting Announcement.”
Bloomberg. 27 April 2016. Retrieved from
http://bloomberg.econoday.com/byshowev
entfull.asp?fid=471649&cust=bloombergus&year=2016&lid=0&prev=/bymonth.asp#
top
2. “10 Year Real Interest Rates.” Multpl. 15 April
2016. Retrieved from
http://www.multpl.com/10-year-realinterest-rate/
3. “Chemicals-Major Diversified.” Yahoo
Finance. N.d. Retrieved from
https://biz.yahoo.com/ic/110.html
4. “Eastman to Acquire Taminco in $2.8 Billion
Transaction.” Eastman. 11 September 2014.
Retrieved from
http://www.eastman.com/Company/News
_Center/2014/Pages/Eastman-to-AcquireTaminco-in-$2.8-Billion-Transaction.aspx
5. “Petroleum & Other Liquids.” U.S. Energy
Information Administration. 11 April 2016.
Retrieved from
https://www.eia.gov/dnav/pet/pet_pri_spt
_s1_d.htm
6. “Eastman Announces Fourth-Quarter and Full
Year 2015 Financial Results.” Eastman. 28
January 2016. Retrieved from
http://www.eastman.com/Company/News
_Center/2016/Pages/Eastman-AnnouncesFourth-Quarter-and-Full-Year-2015Financial-Results.aspx
7. “Currency Strength Heatmap Table.” Oanda.
17 April 2016. Retrieved from
https://www.oanda.com/forextrading/analysis/currency-heatmap
8. Eastman Chemical Company 2015 10K
9. “PPI-FD.” Bloomberg. 13 April 2016.
Retrieved from
http://www.bloomberg.com/markets/econ
omic-calendar
10. Muir, Christopher. "Chemical Industry
Overview." S&P Capital IQ. November 2015.
Accessed February 8, 2016.
http://www.netadvantage.standardandpoo
rs.com.proxy.lib.uiowa.edu/NASApp/NetAd
vantage/showIndustrySurvey.do?code=che.
11. "Industry Overview: Diversified Chemicals."
Value Line. Accessed February 9, 2016.
http://www.valueline.com/Stocks/Industrie
s/Industry_Overview__Diversified_Chemica
ls.aspx#.VrmENM5-GfQ.
12. "Chemicals." Fidelity. Accessed February 9,
2016.
https://eresearch.fidelity.com/eresearch/m
arkets_sectors/sectors/industries.jhtml?tab
=learn&industry=151010.
13. Weller, Chris. "China Is Building a Megacity
That Will Be Larger than All of Japan."
Business Insider. 2015. Accessed February
9, 2016.
http://www.businessinsider.com/chinamegacity-in-beijing-will-be-larger-thanjapan-2015-7.
14. "Green Industry Analysis 2016 - Cost &
Trends." Franchise Help. Accessed February
9, 2016.
https://www.franchisehelp.com/industryreports/green-industry-report/.
15. "Eastman Chemical Company Profile."
Eastman Chemical Company. Accessed
February 15, 2016.
http://www.eastman.com/Company/About
_Eastman/Pages/Profile.aspx.
16. http://www.eastman.com/Company/News
_Center/2016/Pages/Eastman-Announces-FourthQuarter-and-Full-Year-2015-Financial-Results.aspx
17. EMN 2015 Annual Report
18. http://www.bloomberg.com/research/stoc
ks/people/person.asp?personId=27483882&privca
pId=109103
19. http://finance.yahoo.com/q/mh;_ylt=AwrC
0CY2YRZXRHgApPSTmYlQ;_ylu=X3oDMTEyNWhqN
HRhBGNvbG8DYmYxBHBvcwMyBHZ0aWQDVklEM
DZfMQRzZWMDc2M-?s=EMN+Major+Holders
20. "Eastman Chemical Company." MarketLine
Advantage. September 3, 2015. Accessed
February 17, 2016.
http://advantage.marketline.com.proxy.lib.
uiowa.edu/Product?pid=2A933CB2-040F47E6-9836-F6D69CBB45CE.
10
Eastman Chemical Company
Revenue Decomposition
Fiscal Years Ending Dec. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2332
2402
2499
2511
2536
2676
2796
2922
3027
3125
-1.50%
3.00%
4.00%
0.50%
1.00%
5.50%
4.50%
4.50%
3.60%
3.23%
Segmented Net Sales
Additives & Functional Products
% Growth
Volume
Price
Manufacturing Locations
Adhesives & Plasticizers
% Growth
Volume
Price
Manufacturing Locations
Advanced Materials
% Growth
Volume
Price
Manufacturing Locations
Fibers
% Growth
Volume
Price
Manufacturing Locations
Specialty Fluids & Intermediates
% Growth
Volume
Price
Manufacturing Locations
Total Sales
Total Change in Growth (%)
% of Total
Additives & Functional Products
Adhesives & Plasticizers
Advanced Materials
Fibers
Specialty Fluids & Intermediates
Total
$
$
$
$
$
$
1,719
29.05%
4
387
16
1,326
-7.40%
13
106
14
2,349
38.67%
4
655
17
1,441
9.58%
11
126
4
2,497
7.72%
14
179
9
9,332
15.34%
18.42%
14.21%
25.17%
15.44%
26.76%
100%
$
$
$
$
$
$
1,821
5.93%
18
102
22
1,363
2.79%
37
37
14
2,378
1.23%
82
29
18
1,457
1.11%
91
16
4
2,490
-0.28%
356
7
15
9,509
1.90%
19.15%
14.33%
25.01%
15.32%
26.19%
100%
$
$
$
$
$
$
2,368
30.04%
4
547
22
1,214
-10.93%
8
149
14
2,414
1.51%
67
36
17
1,219
-16.33%
5
238
3
2,388
-4.10%
23
102
16
9,603 $
0.99%
24.66%
12.64%
25.14%
12.69%
24.87%
100%
22
23
23
23
23
23
23
23
23
23
1190
1261
1356
1458
1562
1644
1725
1816
1876
1938
-2.00%
6.00%
7.50%
7.55%
7.10%
5.25%
4.95%
5.30%
3.30%
3.27%
14
2480
15
2701
15
2915
15
3121
15
3324
15
3507
15
3693
15
3893
15
4029
15
4163
2.75%
8.90%
7.90%
7.10%
6.50%
5.50%
5.30%
5.40%
3.50%
3.34%
17
1195
17
1266
17
1349
17
1446
17
1550
17
1615
17
1683
17
1763
17
1839
17
1899
-2.00%
6.00%
6.50%
7.20%
7.20%
4.20%
4.20%
4.80%
4.30%
3.26%
3
2531
3
2691
3
2882
3
3109
3
3364
3
3634
3
3917
3
4215
3
4393
3
4567
6.00%
6.30%
7.10%
7.90%
8.20%
8.00%
7.80%
7.60%
4.24%
3.95%
16
16
16
16
16
16
16
16
16
16
9,728 $ 10,322 $ 10,999 $ 11,646 $ 12,336 $ 13,075 $ 13,814 $ 14,609 $ 15,165 $ 15,692
1.31%
6.10%
6.56%
5.88%
5.93%
5.99%
5.65%
5.76%
3.81%
3.48%
23.98%
12.23%
25.50%
12.28%
26.02%
100.00%
23.28%
12.22%
26.17%
12.27%
26.07%
100.00%
22.72%
12.33%
26.50%
12.26%
26.20%
100.00%
21.56%
12.52%
26.80%
12.41%
26.70%
100.00%
20.56%
12.66%
26.95%
12.56%
27.27%
100.00%
20.46%
12.57%
26.82%
12.35%
27.79%
100.00%
20.24%
12.49%
26.73%
12.18%
28.36%
100.00%
20.00%
12.43%
26.64%
12.07%
28.85%
100.00%
19.96%
12.37%
26.57%
12.13%
28.97%
100.00%
19.91%
12.35%
26.53%
12.10%
29.10%
100.00%
Eastman Chemical Company (NYSE:EMN)
Income Statement (numbers in millions)
Fiscal Years Ending Dec. 31
Sales
Cost of sales
Less: Depreciation and ammortization
Gross profit
Selling, general and administrative expense
Research and development expenses
Asset impairments and restructuring charges / gains, net
Other operating income
EBIT (Operating Income)
Net interest expense
Early debt extinguishment costs
Other charges / income, net
Earnings from continuing operations before income taxes
Provision for income taxes
Earnings from continuing operations
Earnings from discontinued operations, net of tax
Gain from disposal of discontinued operations, net of tax
Net earnings
Less: Net income related to non-controlling interest
Net income
Earnings Per Share (EPS)
EPS (basic)
Total Shares Outstanding
Dividends per Share
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
9,350.0
-6,141.0
-433.0
2,776.0
-645.0
-193.0
-76.0
0.0
1,862.0
-180.0
0.0
-3.0
1,679.0
-507.0
1,172.0
0.0
0.0
1,172.0
-7.0
1,165.0
9,527.0
-6,856.0
-450.0
2,221.0
-755.0
-227.0
-77.0
0.0
1,162.0
-187.0
0.0
15.0
990.0
-235.0
755.0
2.0
0.0
757.0
-6.0
751.0
9,648.0
-6,497.0
-571.0
2,580.0
-762.0
-251.0
-183.0
0.0
1,384.0
-263.0
0.0
8.0
1,129.0
-275.0
854.0
0.0
0.0
854.0
-6.0
848.0
9,774
(6,646)
(533)
2,595
(733)
(206)
(98)
0.00
1,558
(332)
0
3
1,230
(323)
906
0
0
906
(5)
901
10,370
(7,052)
(565)
2,753
(778)
(219)
(104)
0.00
1,653
(337)
0
3
1,319
(347)
972
0
0
972
(5)
967
11,051
(7,514)
(602)
2,934
(829)
(233)
(111)
0.00
1,762
(351)
0
3
1,414
(372)
1,042
0
0
1,042
(5)
1,037
11,700
(7,956)
(638)
3,106
(878)
(247)
(117)
0.00
1,865
(369)
0
3
1,500
(395)
1,105
0
0
1,105
(5)
1,100
12,394
(8,428)
(675)
3,291
(930)
(261)
(124)
0.00
1,976
(387)
0
3
1,593
(419)
1,174
0
0
1,174
(5)
1,169
13,136
(8,933)
(716)
3,488
(985)
(277)
(131)
0.00
2,094
(405)
0
3
1,693
(445)
1,247
0
0
1,247
(5)
1,242
13,878
(9,437)
(756)
3,685
(1,041)
(293)
(139)
0.00
2,213
(425)
0
3
1,791
(471)
1,320
0
0
1,320
(5)
1,315
14,677
(9,981)
(800)
3,897
(1,101)
(309)
(147)
0.00
2,340
(446)
0
3
1,897
(499)
1,398
0
0
1,398
(5)
1,393
15,236
(10,360)
(830)
4,045
(1,143)
(321)
(152)
0.00
2,429
(469)
0
3
1,963
(516)
1,447
0
0
1,447
(5)
1,442
15,765
(10,721)
(859)
4,186
(1,182)
(332)
(158)
0.00
2,513
(493)
0
3
2,024
(532)
1,491
0
0
1,491
(5)
1,486
7.57
152
1.25
5.03
149
1.45
5.71
148
1.66
6.17
144
1.85
6.78
141
2.03
7.43
138
2.23
8.05
135
2.42
8.73
133
2.62
9.45
130
2.83
10.17
128
3.05
10.96
126
3.29
11.51
124
3.45
12.04
123
3.61
Eastman Chemical Company
Balance Sheet (numbers in millions)
(2015 data unfinished)
Fiscal Years Ending Dec. 31
Assets
Current Assets
Cash and cash equivalents
Trade receivables, net
Miscellaneous receivables
Inventories
Other current assets
Total current assets
Properties
Properties and equipment at cost
Less: Accumulated depreciation
Net properties
Goodwill
Intangible assets, net of accumulated amortization
Other noncurrent assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities
Borrowings due within one year
Total current liabilities
Long-term borrowings
Deferred income tax liabilities
Post-employment obligations
Other long-term liabilities
Total liabilities
Stockholders' equity
Common stock/Additional paid-in-capital
Retained Earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity before treasury stock
Less: Treasury stock
Total stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and stockholders' equity
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
237.00
880.00
208.00
1,264.00
251.00
2,840.00
214.00
936.00
264.00
1,509.00
250.00
3,173.00
293.00
792.00
246.00
1,479.00
68.00
2,878.00
72.61
635.31
293.22
1,759.33
195.48
2,956
389.12
674.06
311.10
1,762.92
207.40
3,345
831.47
718.30
331.52
1,768.11
221.01
3,870
1,387.00
760.52
351.01
1,638.04
234.01
4,371
1,786.92
805.62
371.82
1,673.20
247.88
4,885
2,216.98
853.85
394.08
1,707.70
262.72
5,435
2,685.74
902.10
416.35
1,734.81
277.57
6,017
3,189.43
954.03
440.32
1,761.28
293.55
6,639
3,725.51
990.33
457.07
1,752.12
304.72
7,230
4,238.74
1,024.76
472.96
1,734.20
315.31
7,786
9,958.00
-5,668.00
4,290.00
2,637.00
1,781.00
297.00
11,845.00
11,026.00
-5,939.00
5,087.00
4,486.00
2,905.00
421.00
16,072.00
11,234.00
-6,104.00
5,130.00
4,518.00
2,650.00
435.00
15,611.00
12,020.38
-6,424.69
5,595.69
4,518.00
2,438.00
351.60
15,859.26
12,861.81
-6,794.82
6,066.99
4,518.00
2,242.96
351.60
16,524.15
13,762.13
-7,217.65
6,544.49
4,518.00
2,063.52
351.60
17,348.03
14,725.48
-7,690.23
7,035.25
4,518.00
1,898.44
351.60
18,173.87
15,756.27
-8,213.83
7,542.43
4,518.00
1,746.57
351.60
19,044.05
16,859.20
-8,790.03
8,069.18
4,518.00
1,606.84
351.60
19,980.95
18,039.35
-9,417.86
8,621.49
4,518.00
1,478.29
351.60
20,985.96
19,302.10
-10,099.51
9,202.60
4,518.00
1,360.03
351.60
22,070.83
20,653.25
-10,821.06
9,832.19
4,518.00
1,251.23
351.60
23,182.78
22,098.98
-11,580.18
10,518.80
4,518.00
1,151.13
351.60
24,325.51
1,470.00
0.00
1,470.00
4,254.00
496.00
1,297.00
453.00
7,970.00
1,721.00
301.00
2,022.00
7,248.00
946.00
1,498.00
768.00
12,482.00
1,625.00
431.00
2,056.00
6,608.00
928.00
1,297.00
701.00
11,590.00
1,759.33
250.00
2,009.33
6,712.73
937.28
1,232.15
463.60
11,355.09
1,866.62
257.50
2,124.12
6,819.48
946.65
1,170.54
454.20
11,515.00
1,989.13
265.23
2,254.35
7,105.38
956.12
1,112.02
460.60
11,888.47
1,989.05
273.18
2,262.23
7,459.65
965.68
1,056.41
475.54
12,219.52
1,983.06
281.38
2,264.43
7,814.76
975.34
1,003.59
488.78
12,546.91
1,970.42
289.82
2,260.24
8,188.94
985.09
953.41
501.88
12,889.56
1,942.99
298.51
2,241.50
8,591.81
994.94
905.74
515.58
13,249.58
1,908.05
307.47
2,215.52
9,023.96
1,004.89
860.46
529.98
13,634.81
1,828.30
316.69
2,144.99
9,490.46
1,014.94
817.43
545.39
14,013.22
1,734.20
326.19
2,060.40
9,968.59
1,025.09
776.56
560.53
14,391.17
1,780.00
4,012.00
171.00
5,963.00
-2,167.00
3,796.00
79.00
3,875.00
11,845.00
1,819.00
4,545.00
-277.00
6,087.00
-2,577.00
3,510.00
80.00
3,590.00
16,072.00
1,865.00
5,146.00
-390.00
6,621.00
-2,680.00
3,941.00
80.00
4,021.00
15,611.00
1,886.20
5,780.15
-262.19
7,404.17
-2,980.00
4,424.17
80.00
4,504.17
15,859.26
1,907.41
6,460.64
-158.90
8,209.15
-3,280.00
4,929.15
80.00
5,009.15
16,524.15
1,928.61
7,189.85
-158.90
8,959.56
-3,580.00
5,379.56
80.00
5,459.56
17,348.03
1,949.82
7,963.43
-158.90
9,754.35
-3,880.00
5,874.35
80.00
5,954.35
18,173.87
1,971.02
8,785.02
-158.90
10,597.14
-4,180.00
6,417.14
80.00
6,497.14
19,044.05
1,992.23
9,658.07
-158.90
11,491.39
-4,480.00
7,011.39
80.00
7,091.39
19,980.95
2,013.43
10,581.86
-158.90
12,436.39
-4,780.00
7,656.39
80.00
7,736.39
20,985.96
2,034.63
11,560.28
-158.90
13,436.02
-5,080.00
8,356.02
80.00
8,436.02
22,070.83
2,055.84
12,572.62
-158.90
14,469.56
-5,380.00
9,089.56
80.00
9,169.56
23,182.78
2,077.04
13,616.19
-158.90
15,534.33
-5,680.00
9,854.33
80.00
9,934.33
24,325.51
Eastman Chemical Company
Cash Flow Statement (numbers in millions)
Fiscal Years Ending Dec. 31
Operating activities
Net earnings / loss
Adjustments to reconcile net earnings / loss to net cash provided by / used in operating activities
Depreciation and amortization
Asset impairment charges
Gain on sale of assets
Early debt extinguishment costs
Provision for deferred income taxes
Mark-to-market (gain) loss on pension and other postretirement benefit plans
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures
Increase (decrease) in trade receivables
Increase (decrease) in inventories
Increase (decrease) in trade payables
Increase (decrease) in liabilities for employee benefit/incentive pay
Pension and other postretirement contributions (in excess of) less than expenses
Variable compensation (in excess of) less than expenses
Other items, net
Net cash provided by operating activities
Investing activities
Additions to properties and equipment
Proceeds from redemption of short-term time deposits
Proceeds from sale of assets and investments
Acquistitions and investments in joint ventures, net of cash acquired
Additions to short-term time deposits
Other items, net
Net cash used in investing activities
Financing activities
Net increase in commerical paper and other borrowings
Proceeds from borrowings
Repayment of borrowings
Dividends paid to stockholders
Treasury stock purchases
Proceeds from stock options exercises and other items, net
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
409.0
300.0
346.0
136.0
427.0
647.0
444.0
1,172.0
757.0
854.0
308.0
62.0
-74.0
0.0
7.0
0.0
327.0
138.0
-8.0
0.0
-9.0
0.0
267.0
1.0
-14.0
0.0
-71.0
0.0
274.0
179.0
0.0
0.0
185.0
0.0
280.0
8.0
0.0
115.0
47.0
0.0
273.0
0.0
-70.0
0.0
-22.0
147.0
360.0
46.0
0.0
0.0
48.0
247.0
433.0
28.0
0.0
0.0
331.0
-383.0
450.0
52.0
-5.0
0.0
99.0
304.0
571.0
107.0
0.0
0.0
107.0
115.0
-82.0
-99.0
53.0
-44.0
0.0
0.0
69.0
609.0
-28.0
66.0
48.0
-55.0
0.0
0.0
-47.0
732.0
261.0
-95.0
-211.0
7.0
0.0
0.0
162.0
653.0
2.0
100.0
16.0
-149.0
0.0
0.0
15.0
758.0
-358.0
-160.0
152.0
0.0
12.0
37.0
15.0
575.0
-73.0
-156.0
-51.0
0.0
-103.0
15.0
18.0
625.0
48.0
38.0
10.0
0.0
-97.0
26.0
-42.0
1,128.0
-38.0
-6.0
-2.0
0.0
-149.0
82.0
-171.0
1,297.0
19.0
-61.0
-30.0
0.0
-165.0
27.0
-39.0
1,408.0
114.0
-26.0
-102.0
0.0
-259.0
71.0
60.0
1,612.0
-389.0
0.0
322.0
0.0
0.0
-27.0
-94.0
-518.0
0.0
202.0
-40.0
0.0
21.0
-335.0
-634.0
0.0
337.0
-38.0
0.0
-41.0
-376.0
-310.0
0.0
30.0
-68.0
0.0
-21.0
-369.0
-243.0
0.0
13.0
-190.0
0.0
-22.0
-442.0
-457.0
0.0
651.0
-156.0
-200.0
20.0
-142.0
-465.0
200.0
7.0
-2,669.0
0.0
-35.0
-2,962.0
-483.0
0.0
31.0
0.0
0.0
-5.0
-457.0
-593.0
0.0
13.0
-3,509.0
0.0
-2.0
-4,091.0
-652.0
0.0
4.0
-45.0
0.0
0.0
-693.0
-50.0
0.0
0.0
-144.0
0.0
93.0
-101.0
1.0
415.0
524.0
939.0
-5.0
0.0
-17.0
-147.0
-382.0
103.0
-448.0
0.0
-51.0
939.0
888.0
-7.0
0.0
-175.0
-135.0
-501.0
39.0
-779.0
1.0
-501.0
888.0
387.0
3.0
248.0
-101.0
-128.0
-21.0
17.0
18.0
-1.0
406.0
387.0
793.0
2.0
496.0
-620.0
-127.0
-280.0
118.0
-411.0
1.0
-277.0
793.0
516.0
1.0
-36.0
-2.0
-136.0
-316.0
66.0
-423.0
1.0
61.0
516.0
577.0
-1.0
3,511.0
-1,866.0
-192.0
0.0
52.0
1,504.0
2.0
-328.0
577.0
249.0
425.0
150.0
-1,105.0
-140.0
-238.0
49.0
-859.0
7.0
-12.0
249.0
237.0
-190.0
3,565.0
-125.0
-210.0
-410.0
34.0
2,664.0
-4.0
-23.0
237.0
214.0
195.0
250.0
-950.0
-238.0
-103.0
14.0
-832.0
-8.0
79.0
214.0
293.0
Eastman Chemical Company
Common Size Income Statement
Fiscal Years Ending Dec. 31
Sales
Cost of sales
Gross profit
Selling, general and administrative expense
Research and development expenses
Asset impairments and restructuring charges / gains, net
Other operating income
EBIT (Operating Income)
Net interest expense
Early debt extinguishment costs
Other charges / income, net
Earnings from continuing operations before income taxes
Provision for income taxes
Earnings from continuing operations
Earnings from discontinued operations, net of tax
Gain from disposal of discontinued operations, net of tax
Net earnings
Less: Net income related to non-controlling interest
Net income
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
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%
-65.68%
34.32%
-6.90%
-2.06%
-0.81%
0.00%
24.55%
-1.93%
0.00%
-0.03%
22.59%
-5.42%
17.17%
0.00%
0.00%
17.17%
-0.07%
17.09%
-71.96%
28.04%
-7.92%
-2.38%
-0.81%
0.00%
16.92%
-1.96%
0.00%
0.16%
15.11%
-2.47%
12.65%
0.02%
0.00%
12.67%
-0.06%
12.61%
-67.34%
32.66%
-7.90%
-2.60%
-1.90%
0.00%
20.26%
-2.73%
0.00%
0.08%
17.62%
-2.85%
14.77%
0.00%
0.00%
14.77%
-0.06%
14.71%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.40%
0.00%
0.03%
18.03%
-3.31%
14.72%
0.00%
0.00%
14.72%
-0.05%
14.67%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.25%
0.00%
0.03%
18.17%
-3.35%
14.83%
0.00%
0.00%
14.83%
-0.05%
14.78%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.18%
0.00%
0.03%
18.24%
-3.37%
14.88%
0.00%
0.00%
14.88%
-0.04%
14.83%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.15%
0.00%
0.03%
18.27%
-3.37%
14.90%
0.00%
0.00%
14.90%
-0.04%
14.85%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.12%
0.00%
0.03%
18.30%
-3.38%
14.92%
0.00%
0.00%
14.92%
-0.04%
14.88%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.08%
0.00%
0.03%
18.33%
-3.39%
14.95%
0.00%
0.00%
14.95%
-0.04%
14.91%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.06%
0.00%
0.02%
18.35%
-3.39%
14.96%
0.00%
0.00%
14.96%
-0.03%
14.92%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.04%
0.00%
0.02%
18.37%
-3.40%
14.97%
0.00%
0.00%
14.97%
-0.03%
14.94%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.08%
0.00%
0.02%
18.33%
-3.39%
14.94%
0.00%
0.00%
14.94%
-0.03%
14.91%
-68.00%
32.00%
-7.50%
-2.11%
-1.00%
0.00%
21.39%
-3.13%
0.00%
0.02%
18.29%
-3.38%
14.91%
0.00%
0.00%
14.91%
-0.03%
14.88%
Eastman Chemical Company
Common Size Balance Sheet
Fiscal Years Ending Dec. 31
Assets
Current Assets
Cash and cash equivalents
Trade receivables, net
Miscellaneous receivables
Inventories
Other current assets
Total current assets
Properties
Properties and equipment at cost
Less: Accumulated depreciation
Net properties
Goodwill
Intangible assets, net of accumulated amortization
Other noncurrent assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Payables and other current liabilities
Borrowings due within one year
Total current liabilities
Long-term borrowings
Deferred income tax liabilities
Post-employment obligations
Other long-term liabilities
Total liabilities
Stockholders' equity
Common stock
Retained Earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity before treasury stock
Less: Treasury stock
Total stockholders' equity
Noncontrolling interest
Total equity
Total liabilities and stockholders' equity
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2.53%
9.41%
2.22%
13.52%
2.68%
30.37%
2.25%
9.82%
2.77%
15.84%
2.62%
33.31%
3.04%
8.21%
2.55%
15.33%
0.70%
29.83%
0.74%
6.50%
3.00%
18.00%
2.00%
30.24%
3.75%
6.50%
3.00%
17.00%
2.00%
32.25%
7.52%
6.50%
3.00%
16.00%
2.00%
35.02%
11.85%
6.50%
3.00%
14.00%
2.00%
37.35%
14.42%
6.50%
3.00%
13.50%
2.00%
39.42%
16.88%
6.50%
3.00%
13.00%
2.00%
41.38%
19.35%
6.50%
3.00%
12.50%
2.00%
43.35%
21.73%
6.50%
3.00%
12.00%
2.00%
45.23%
24.45%
6.50%
3.00%
11.50%
2.00%
47.45%
26.89%
6.50%
3.00%
11.00%
2.00%
49.39%
106.50%
-60.62%
45.88%
28.20%
19.05%
3.18%
126.68%
115.73%
-62.34%
53.40%
47.09%
30.49%
4.42%
168.70%
116.44%
-63.27%
53.17%
46.83%
27.47%
4.51%
161.81%
122.98%
-65.73%
57.25%
46.22%
24.94%
3.60%
162.26%
124.03%
-65.52%
58.50%
43.57%
21.63%
3.39%
159.34%
124.54%
-65.31%
59.22%
40.88%
18.67%
3.18%
156.99%
125.86%
-65.73%
60.13%
38.61%
16.23%
3.01%
155.33%
127.13%
-66.27%
60.85%
36.45%
14.09%
2.84%
153.65%
128.34%
-66.91%
61.43%
34.39%
12.23%
2.68%
152.11%
129.98%
-67.86%
62.12%
32.55%
10.65%
2.53%
151.21%
131.51%
-68.81%
62.70%
30.78%
9.27%
2.40%
150.37%
135.56%
-71.02%
64.53%
29.65%
8.21%
2.31%
152.16%
140.17%
-73.45%
66.72%
28.66%
7.30%
2.23%
154.30%
15.72%
0.00%
15.72%
45.50%
5.30%
13.87%
4.84%
85.24%
18.06%
3.16%
21.22%
76.08%
9.93%
15.72%
8.06%
131.02%
16.84%
4.47%
21.31%
68.49%
9.62%
13.44%
7.27%
120.13%
18.00%
2.56%
20.56%
68.68%
9.59%
12.61%
4.74%
116.18%
18.00%
2.48%
20.48%
65.76%
9.13%
11.29%
4.38%
111.04%
18.00%
2.40%
20.40%
64.30%
8.65%
10.06%
4.17%
107.58%
17.00%
2.33%
19.33%
63.76%
8.25%
9.03%
4.06%
104.44%
16.00%
2.27%
18.27%
63.05%
7.87%
8.10%
3.94%
101.23%
15.00%
2.21%
17.21%
62.34%
7.50%
7.26%
3.82%
98.12%
14.00%
2.15%
16.15%
61.91%
7.17%
6.53%
3.71%
95.47%
13.00%
2.09%
15.09%
61.48%
6.85%
5.86%
3.61%
92.90%
12.00%
2.08%
14.08%
62.29%
6.66%
5.37%
3.58%
91.98%
11.00%
2.07%
13.07%
63.23%
6.50%
4.93%
3.56%
91.28%
19.04%
42.91%
1.83%
63.78%
-23.18%
40.60%
0.84%
41.44%
126.68%
19.09%
47.71%
-2.91%
63.89%
-27.05%
36.84%
0.84%
37.68%
168.70%
19.33%
53.34%
-4.04%
68.63%
-27.78%
40.85%
0.83%
41.68%
161.81%
19.30%
59.14%
-2.68%
75.75%
-30.49%
45.26%
0.82%
46.08%
162.26%
18.39%
62.30%
-1.53%
79.16%
-31.63%
47.53%
0.77%
48.30%
159.34%
17.45%
65.06%
-1.44%
81.08%
-32.40%
48.68%
0.72%
49.40%
156.99%
16.66%
68.06%
-1.36%
83.37%
-33.16%
50.21%
0.68%
50.89%
155.33%
15.90%
70.88%
-1.28%
85.50%
-33.73%
51.78%
0.65%
52.42%
153.65%
15.17%
73.52%
-1.21%
87.48%
-34.10%
53.37%
0.61%
53.98%
152.11%
14.51%
76.25%
-1.14%
89.61%
-34.44%
55.17%
0.58%
55.74%
151.21%
13.86%
78.76%
-1.08%
91.54%
-34.61%
56.93%
0.55%
57.48%
150.37%
13.49%
82.52%
-1.04%
94.97%
-35.31%
59.66%
0.53%
60.18%
152.16%
13.17%
86.37%
-1.01%
98.53%
-36.03%
62.51%
0.51%
63.01%
154.30%
Eastman Chemical Company
Weighted Average Cost of Capital (WACC) Estimation
Capital Asset Pricing Model
Risk Free (30yr)
Risk Premium
Beta
Cost of Equity
Cost of Debt
7.37%
2.61%
4.57%
1.55
9.69%
4.95%
*Beta is 3yr monthly
EMN 30yr
BBB, Baa2
Issued 5/15/2014
Price
$76.72
Equity
Preferred
Debt
Total
Market Values
Weights
$ 11,336,300,640
61.65%
$
0%
$ 7,050,381,571
38.35%
$ 18,386,682,211
100%
Eastman Chemical Company
Value Driver Estimation
Fiscal Years Ending Dec. 31
Marginal Tax Rate:
2013
33.47%
2014
24.65%
2015
26.31%
2016E
26.31%
2017E
26.31%
2018E
26.31%
2019E
26.31%
2020E
26.31%
2021E
26.31%
2022E
26.31%
2023E
26.31%
2024E
26.31%
2025E
26.31%
9,350
9,527
9,648
9,774
10,370
11,051
11,700
12,394
13,136
13,878
14,677
15,236
15,765
(6,141)
(645)
(433)
(193)
(6,856)
(755)
(450)
(227)
(6,497)
(762)
(571)
(251)
(6,646)
(733)
(533)
(206)
(7,052)
(778)
(565)
(219)
(7,514)
(829)
(602)
(233)
(7,956)
(878)
(638)
(247)
(8,428)
(930)
(675)
(261)
(8,933)
(985)
(716)
(277)
(9,437)
(1,041)
(756)
(293)
(9,981)
(1,101)
(800)
(309)
(10,360)
(1,143)
(830)
(321)
(10,721)
(1,182)
(859)
(332)
11
1,938
12
1,239
11
1,567
11
1,656
11
1,757
11
1,872
11
1,982
11
2,100
11
2,226
11
2,351
11
2,487
11
2,581
11
2,671
507
25
60
235
19
46
275
48
69
323
26
87
347
27
89
372
29
92
395
31
97
419
33
102
445
35
107
471
37
112
499
39
117
516
40
123
532
41
130
4
1
597
3
-4
299
3
-2
393
3
-1
439
3
-1
465
3
-1
496
3
-1
524
3
-1
555
3
-1
588
3
-1
622
3
-1
657
3
-1
682
3
-1
706
314
1,655
450
1,390
(18)
1,156
9
1,227
9
1,301
9
1,386
10
1,467
10
1,554
10
1,647
10
1,740
10
1,839
10
1,909
10
1,976
237
880
208
1,264
251
2,840
214
936
264
1,509
250
3,173
293
792
246
1,479
68
2,878
254
635
293
1,759
195
3,137
270
674
311
1,763
207
3,225
287
718
332
1,768
221
3,326
293
761
351
1,638
234
3,276
310
806
372
1,673
248
3,408
328
854
394
1,708
263
3,547
347
902
416
1,735
278
3,678
367
954
440
1,761
294
3,816
381
990
457
1,752
305
3,885
394
1,025
473
1,734
315
3,941
1,470.00
1,470.00
1,370
1,721.00
1,721.00
1,452
1,625.00
1,625.00
1,253
1,759.33
1,759.33
1,378
1,866.62
1,866.62
1,358
1,989.13
1,989.13
1,337
1,989.05
1,989.05
1,287
1,983.06
1,983.06
1,425
1,970.42
1,970.42
1,576
1,942.99
1,942.99
1,735
1,908.05
1,908.05
1,908
1,828.30
1,828.30
2,057
1,734.20
1,734.20
2,207
Plus: PPE, net
Plus: Non-Goodwill Intangible Assets
Plus: PV of operating leases
Invested Capital
4,290
4,918
176
10,578
5,087
6,499
259
13,038
5,130
5,963
230
12,346
5,596
5,746
210
12,929
6,067
5,939
210
13,574
6,544
6,286
210
14,377
7,035
6,621
210
15,153
7,542
6,984
210
16,161
8,069
7,394
210
17,249
8,621
7,846
210
18,412
9,203
8,350
210
19,671
9,832
8,833
210
20,931
10,519
9,289
210
22,224
NOPLAT
Beginning Invested Capital
ROIC
1,655
8,966
18.45%
1,390
10,578
13.14%
1,156
13,038
8.86%
1,227
12,346
9.94%
1,301
12,929
10.06%
1,386
13,574
10.21%
1,467
14,377
10.21%
1,554
15,153
10.26%
1,647
16,161
10.19%
1,740
17,249
10.09%
1,839
18,412
9.99%
1,909
19,671
9.71%
1,976
20,931
9.44%
NOPLAT
Change in Invested Capital
1,655
1,612
43
1,390
2,460
(1,070)
1,156
(692)
1,848
1,227
583
643
1,301
645
656
1,386
803
584
1,467
776
692
1,554
1,008
546
1,647
1,088
559
1,740
1,163
576
1,839
1,258
581
1,909
1,261
649
1,976
1,293
682
Beginning Invested Capital
ROIC
8,966
18.45%
993.36
10,578
13.14%
609.53
13,038
8.86%
194.34
12,346
9.94%
316.18
12,929
10.06%
347.69
13,574
10.21%
385.18
14,377
10.21%
407.19
15,153
10.26%
436.71
16,161
10.19%
455.08
17,249
10.09%
467.63
18,412
9.99%
481.67
19,671
9.71%
458.73
20,931
9.44%
431.99
NOPLAT
EBITA:
Sales
Less: Cost of Goods Sold
Less: Selling, General, and Administrative Expenses
Less: Depreciation
Less: R&D Expenses
Plus: Implied interest of operating leases
EBITA:
Less: Adjusted Taxes
Income Tax Provision
Plus: Tax shield on assets and impairments
Plus: Tax shield on interest expense
Plus: Tax Shield on Implied interest of operating leases
Less: Tax on non-operating income
Total Adjusted Taxes
Plus: Change in Deferred Taxes
Change in Deferred Taxes
NOPLAT:
Invested Capital
Net Operating Working Capital:
Current Assets:
Normal Cash (2.5% of sales)
Trade receivables, net
Miscellaneous receivables
Inventories
Other current assets
Total current assets
Current liabilities
Payables and other current liabilities
Total current liabilities
Net Operating Working Capital
FCF
EP
Eastman Chemical Company
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
3.48% Assuming Terminal growth starts yr 2025
9.44%
7.37%
9.69%
Fiscal Years Ending Dec. 31
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025CV
643
656
584
692
546
559
576
581
649
643
1
599
656
2
569
584
3
471
692
4
520
546
5
382
559
6
365
576
7
350
581
8
329
649
9
342
682
32014
32014
9
16875
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025CV
12346
316
348
385
407
437
455
468
482
459
316
1
294
348
2
302
385
3
311
407
4
306
437
5
306
455
6
297
468
7
284
482
8
273
459
9
242
432
11083
11083
9
5842
DCF Model
Free Cash Flows
Continuing Value (CV)
CF to Discount
Periods to Discount
PV of Operating Assets
Value of Operating Assets
Add: Excess Cash
Add: Other Non Current Assets
Less: Total Debt
Less: PV of Operating Leases
Less: PV of ESOP
Value of Equity
Shares Outstanding
Target Price (Intrinsic Value)
Fraction of Year Elapsed
Adjusted Stock Price as of Today
$
$
Fiscal Years Ending 12
EP Model
Beginning Invested Capital
Economic Profit
Continuing Value (CV)
EP to Discount
Periods to Discount
PV of Operating Assets
Value of Operating Assets
Add: Excess Cash
Add: Other Non Current Assets
Less: Total Debt
Less: PV of Operating Leases
Less: PV of ESOP
Value of Equity
Shares Outstanding
Target Price (Intrinsic Value)
Fraction of Year Elapsed
Adjusted Stock Price as of Today
Today
Next FYE
Last FYE
Days in FY
Days to FYE
Elapsed Fraction
$
$
20803
0
435
11355
210
68
9606
148
65.01
0.301
66.31
20803
0
435
11355
210
68
9606
148
65.01
0.301
66.31
4/19/2016
12/31/2016
12/31/2015
366
110
0.301
Eastman Chemical Company
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
EPS
2016E
$
Key Assumptions
CV growth
CV ROE
Cost of Equity
Dividend Yield
Intrinsic Value
Fraction of Year Elapsed
Adjusted Stock Price as of Today
6.78 $
2018E
7.43 $
2019E
8.05 $
2020E
8.73 $
2021E
2022E
2023E
2024E
2025E
9.45 $ 10.17 $ 10.96 $ 11.51 $ 12.04
4.57%
15.08%
9.69%
2.51%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Periods to Discount
Future Cash Flows
Discounted Cash Flows
6.17 $
2017E
$
1.85
1
2.03
2
2.23
3
2.42
4
2.62
5
2.83
6
3.05
7
3.29
8
13.61
$ 12.04
$ 163.77
3.45
3.61
9
9
1.69 $
1.69 $
1.69 $
1.67 $
1.65 $
1.63 $
1.60 $
1.57 $
1.50
$ 85.17
0.3005
$ 87.05
70.49
Eastman Chemical Company
Relative Valuation Models
Ticker
CE
DOW
DD
PX
ASH
APD
Company
Celanese Corporation
Dow Chemical Company
Dupont
Praxaire, Inc.
Ashland, Inc.
Airproducts and Chemicals, Inc
EMN
Eastman Chemical Company
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
PEG Ratio (EPS16)
PEG Ratio (EPS17)
Price
$69.86
$52.54
$64.70
$116.12
$113.09
$146.47
EPS
2016E
$6.33
$3.44
$3.03
$5.54
$7.14
$7.41
EPS
2017E
$6.97
$3.86
$3.51
$6.08
$7.99
$8.11
Average
$76.72
$5.71
$6.78
$ 99.19
$ 105.57
$ 102.51
$ 109.24
P/E 16
11.0
15.3
21.4
21.0
15.8
19.8
17.4
P/E 17
10.0
13.6
18.4
19.1
14.2
18.1
15.6
18.0
18.0
Est. 5yr
EPS gr.
7.44
7.82
9.41
6.75
11.39
10.05
8.85
PEG 16
1.48
1.95
2.27
3.11
1.39
1.97
2.0
2.0
PEG 17
1.35
1.74
1.96
2.83
1.24
1.80
1.8
2.0
Eastman Chemical Company
Key Management Ratios
Fiscal Years Ending Dec. 31
Formula
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
Current Assets/Current Liabilities
(Current Assets-Inventories)/Current Liabilit
(Cash Equivalents+Cash)/Current Liabilities
1.93
0.76
0.16
1.57
0.57
0.11
1.40
0.53
0.14
1.47
0.35
0.04
1.57
0.50
0.18
1.72
0.69
0.37
1.93
0.95
0.61
2.16
1.14
0.79
2.40
1.36
0.98
2.68
1.60
1.20
3.00
1.87
1.44
3.37
2.20
1.74
3.78
2.55
2.06
Activity or Asset-Management Ratios
Receivables T/O
Inventory T/O
Total Asset T/O
Sales/Average Accounts Receivables
Cost of Goods Sold/Inventories
Sales/Total Assets
10.63
4.86
0.79
10.18
4.54
0.59
12.18
4.39
0.62
15.38
3.78
0.62
15.38
4.00
0.63
15.38
4.25
0.64
15.38
4.86
0.64
15.38
5.04
0.65
15.38
5.23
0.66
15.38
5.44
0.66
15.38
5.67
0.67
15.38
5.91
0.66
15.38
6.18
0.65
Financial Leverage Ratios
Debt/Equity
Interest Coverage
Total Debt/Total Equity
EBIT/Interest Expense
1.10
10.34
2.10
6.21
1.75
5.26
1.55
4.69
1.41
4.90
1.35
5.01
1.30
5.06
1.25
5.11
1.20
5.17
1.15
5.21
1.11
5.24
1.07
5.17
1.04
5.10
Profitability Ratios
Gross Margin
Operating Margin
FCF Margin
ROA
ROE
(Revenue-Cost of Goods Sold)/Revenue
Operating Income/Net Sales
FCF/Net Sales
Net Income/Average Total Assets
Net Income/Average Total Equity
30%
20%
0%
8%
31%
23%
12%
-11%
4%
21%
27%
14%
19%
4%
22%
27%
16%
7%
4%
20%
27%
16%
6%
4%
20%
27%
16%
5%
4%
19%
27%
16%
6%
4%
19%
27%
16%
4%
4%
18%
27%
16%
4%
4%
18%
27%
16%
4%
4%
17%
27%
16%
4%
4%
17%
27%
16%
4%
4%
16%
27%
16%
4%
4%
15%
Payout Policy Ratios
Dividend payout ratio
Retention ratio
Dividends/Net Income
(Net Income-Dividends)/Net Income
16%
84%
29%
71%
29%
71%
30%
70%
30%
70%
30%
70%
30%
70%
30%
70%
30%
70%
30%
70%
30%
70%
30%
70%
30%
70%
Sensitivity Analysis
CV ROIC
CV Growth
$ 66.31
8.60%
8.80%
9.00%
9.20%
9.44%
9.60%
9.80%
10.00%
10.20%
10.40%
$ 66.31
2.40%
2.60%
2.80%
8.00%
3.47%
3.40%
3.60%
3.80%
4.00%
4.20%
4.20%
82.1937
82.1937
82.1937
82.1937
82.1937
82.1937
82.1937
82.1937
82.1937
82.1937
6.00%
66.293
66.293
66.293
66.293
66.293
66.293
66.293
66.293
66.293
66.293
4.30%
77.5949
77.5949
77.5949
77.5949
77.5949
77.5949
77.5949
77.5949
77.5949
77.5949
6.50%
66.3011
66.3011
66.3011
66.3011
66.3011
66.3011
66.3011
66.3011
66.3011
66.3011
4.40%
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
Beta
4.57%
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
73.2333
7.00%
66.3089
66.3089
66.3089
66.3089
66.3089
66.3089
66.3089
66.3089
66.3089
66.3089
WACC
7.30%
66.3135
66.3135
66.3135
66.3135
66.3135
66.3135
66.3135
66.3135
66.3135
66.3135
MRP
4.50%
69.0911
69.0911
69.0911
69.0911
69.0911
69.0911
69.0911
69.0911
69.0911
69.0911
7.70%
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
4.60%
65.1524
65.1524
65.1524
65.1524
65.1524
65.1524
65.1524
65.1524
65.1524
65.1524
8.10%
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
Beta
MRP
$ 66.31
3.80%
4.00%
4.20%
4.40%
4.57%
4.80%
5.00%
5.20%
5.40%
5.60%
0.8
350.491
321.258
295.633
272.987
272.987
234.773
218.506
203.776
190.375
178.131
1.2
172.398
156.566
142.519
129.971
129.971
108.509
99.2625
90.8312
83.1129
76.021
1.4
128.009
115.187
103.777
93.5577
93.5577
76.021
68.4425
61.5206
55.1741
49.3344
1.6
96.3669
85.6121
76.021
67.4155
67.4155
52.6129
46.2024
40.3401
34.9592
30.0027
1.8
2.1
72.6868 46.5862
63.4363 38.9522
55.1741 32.1222
47.7507 25.9761
47.7507 25.9761
34.9592 15.3621
29.4106 10.7456
24.3316 6.50414
19.665 2.53277
15.3621 -0.65795
MRP
$ 66.31
2.40%
2.60%
2.80%
3.00%
3.47%
3.60%
3.80%
4.00%
4.20%
4.40%
$ 66.31
5.60%
5.70%
5.80%
5.90%
Growth of PPE 7.00%
6.10%
6.20%
6.30%
6.40%
6.50%
6.00%
66.293
66.293
66.293
66.293
66.293
66.293
66.293
66.293
66.293
66.293
300
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
6.40%
66.2995
66.2995
66.2995
66.2995
66.2995
66.2995
66.2995
66.2995
66.2995
66.2995
400
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
6.80%
66.3058
66.3058
66.3058
66.3058
66.3058
66.3058
66.3058
66.3058
66.3058
66.3058
500
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
7.30%
66.30581
66.30581
66.30581
66.30581
66.30581
66.30581
66.30581
66.30581
66.30581
66.30581
7.70%
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
66.3195
8.10%
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
66.3253
Capital Expenditure
583
600
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
700
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
800
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
66.31
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
Range 1
Range 2
Range 3
Range 4
Total
Average
Number
Exercise
of Shares
Price
272,100
27.00
211,700
32.00
868,000
39.00
1,082,800
76.00
2,434,600 $
53.51
EMN
$76.72
1.32%
2.46%
38.80%
Average
Remaining
Life (yrs)
3.70
1.20
5.30
8.40
6.14
$
$
$
$
$
B-S
Option
Price
45.59
43.15
37.05
25.04
38.91
$
$
$
$
$
Value
of Options
Granted
12,403,891
9,135,216
32,162,596
27,117,952
80,819,655
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares):
Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
2,434,600
6.14
396,295
$
53.51
7.30%
$76.72
2016E
2017E
2018E
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
2019E
2020E
2021E
2022E
2023E
2024E
2025E
396,295
396,295
396,295
396,295
396,295
396,295
396,295
396,295
396,295
396,295
$
53.51 $
53.51 $
53.51 $
53.51 $
53.51 $
53.51 $
53.51 $
53.51 $
53.51 $
53.51
21,204,191 21,204,191 21,204,191 21,204,191 21,204,191 21,204,191 21,204,191 21,204,191 21,204,191 21,204,191
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000 300,000,000
$
76.72 $
82.32 $
88.33 $
94.78 $ 101.70 $ 109.13 $ 117.09 $ 125.64 $ 134.82 $ 144.66
3,910,323
3,644,247
3,396,275
3,165,177
2,949,803
2,749,085
2,562,025
2,387,693
2,225,223
2,073,808
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)
147,762,000 144,247,972 141,000,020 138,000,040 135,231,158 132,677,650 130,324,859 128,159,130 126,167,732 124,338,804
396,295
396,295
396,295
396,295
396,295
396,295
396,295
396,295
396,295
396,295
2,387,693
2,562,025
2,225,223
2,073,808
2,949,803
2,749,085
3,644,247
3,396,275
3,165,177
3,910,323
144,247,972 141,000,020 138,000,040 135,231,158 132,677,650 130,324,859 128,159,130 126,167,732 124,338,804 122,661,291
Present Value of Operating Lease Obligations (2015)
Present Value of Operating Lease Obligations (2014)
Operating
Leases
63
50
38
28
22
72
273
43
230
Fiscal Years Ending Dec. 31
2016
2017
2018
2019
2020
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
63
50
38
28
22
22
Present Value of Operating Lease Obligations (2013)
Operating
Leases
71
57
43
32
21
85
309
50
259
Fiscal Years Ending Dec. 31
2015
2016
2017
2018
2019
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
4.95%
3.3
PV Lease
Payment
60.0
45.4
32.9
23.1
17.3
51.1
229.7
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
71
57
43
32
21
21
Present Value of Operating Lease Obligations (2012)
Operating
Leases
44
38
35
24
15
54
210
34
176
Fiscal Years Ending
2014
2015
2016
2017
2018
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
4.95%
4.0
PV Lease
Payment
67.7
51.8
37.2
26.4
16.5
59.2
258.7
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
44
38
35
24
15
15
Operating
Leases
47
34
27
23
21
55
207
33
174
#REF!
2013
2014
2015
2016
2017
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
4.95%
3.6
PV Lease
Payment
41.9
34.5
30.3
19.8
11.8
38.0
176.3
Pre-Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
47
34
27
23
21
21
4.95%
2.6
PV Lease
Payment
44.8
30.9
23.4
19.0
16.5
39.6
174.1