Published On: Wed, Nov 14th, 2012

Specialty Chemicals, Buyout Fuel Eastman’s Growth

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Photo giant Eastman Kodak filed for bankruptcy in January. But Eastman Chemical, the stand-alone company that once produced chemicals for the film pioneer, survives. It has even been on a tear. Shares are up more than 50% so far this year.

Chemicals these days come in two basic varieties. Commodity chemicals are widely made, often suffer from production overcapacity and carry low margins.

Specialty chemicals, by contrast, are more differentiated and bring superior profit margins. Eastman Chemical (EMN) has found favor with Wall Street as it has demonstrated earnings strength while expanding its portfolio of high-margin specialty products.

 In the third quarter, Eastman delivered pro forma earnings of $1.57. The pro forma earnings exclude significant acquisition and restructuring charges. Still, they easily topped Wall Street estimates. And analysts were impressed that Eastman held up so well despite weakness in Europe and concerns about growth in Asia.

Solutia Acquisition

But the real kicker to Eastman shares has been the $4.8 billion acquisition of St. Louis-based Solutia.

Analysts applaud the deal for broadening Eastman’s portfolio of high-margin specialty products. With Solutia, Morgan Stanley analyst Vincent Andrews wrote in October, Eastman now derives 70% of its revenue from such specialty items. And 30% of Solutia sales are in Asia, broadening Eastman’s exposure to fast growing markets.

So what exactly does Solutia make?

Saflex, says Lazard Capital Markets analyst Edlain Rodriguez, is one key product. Saflex is an advanced material used in commercial glass and auto windshields. Fitting between two panels of glass, it “prevents the glass from shattering,” said Rodriguez.

Saflex boosts Eastman’s profile in the auto and construction industries. These two industries are likely to benefit smartly from global economic recovery, once it develops. And Saflex is highly profitable. In 2011, Saflex sales yielded EBITDA margins of 35%, says Rodriguez.

Solutia also sells Crystex, an additive that slows the wear on tires. And Skydrol is a jet fuel additive that protects against corrosion.

These new products come atop Eastman’s traditional core strength in petrochemicals. Eastman is a vertically integrated manufacturer that converts natural gas liquids like propane and ethane into propylene and ethylene. “The products they sell use propylene, which they make,” said Rodriguez. The process of converting propane and ethane into propylene and ethylene is called cracking. Eastman has extensive cracking capacity at its Longview, Texas, plants. Since propane and ethane are raw materials, Eastman benefits when prices of these hydrocarbons are low. Such has been the case of late.


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