On a day where most stocks were in the red, Eastman Chemical was particularly hard hit. Shares of the specialty chemicals company slumped -9.2% to a price of $86.13, which is 23.78% below its average analyst target price of $113. EMN lagged the S&P 500 index by -6.2% so far today and by -1.7% over the last year, returning -9.2%
Eastman chemical 's trailing 12 month P/E ratio is 9.4, based on its trailing Eps of $9.14. The company has a forward P/E ratio of 8.4 according to its forward Eps of $10.26 -- which is an estimate of what its earnings will look like in the next quarter. As of the second quarter of 2022, the basic materials sector has an average P/E ratio of 8.77, and the average for the S&P 500 is 15.97.
Unlike earnings, which take into account general and administrative expenses, depreciation, interest, and taxes, gross profits are calculated only on the basis of the company's cost of goods sold (i.e. cost of labor and materials only) subtracted from sales revenues. Strong gross profit margins shed light on how much freedom the company has in setting the prices of its products.
A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. In EMN's case, the gross profit margins are 22.4%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market.
The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently from their core business: cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's levered free cash flow, which for Eastman Chemical is $1,742,375,040.
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in EMN have received an annualized dividend yield of 3.1% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts).
Eastman chemical 's P/B ratio is 2.0 -- in other words, the market value of the company exceeds its book value by a factor 2, so the company's assets may be overvalued compared to the average P/B ratio of the Basic Materials sector, which stands at 1.85 as of the second quarter of 2022.
As of second quarter of 2022, Eastman chemical is likely a fairly valued company. It has above average P/E and P/B ratios, but decent profit margins, an analyst consensus of strong upside potential, and strong cashflows. We hope this preliminary analysis will encourage you to do your own research into EMN's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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