Taking a Closer Look at Eastman Chemical Company's (EMN) Valuation

Shares of Eastman Chemical Company (EMN) slid -0.4 % during today's afternoon session, which brings their 52 week performance to -29.6%. The Market Inference outlook on this stock is that it is overvalued at today's price of $85.64. But we also believe that a value analysis should be complemented by an overview of the company's poor growth indicators and mixed market sentiment.

Eastman Chemical Company operates as a specialty materials company in the United States and internationally. The large-cap Basic Materials company has 14,000 full time employees and is based in Kingsport, United States. The company's dividend currently yields 3.69%.

EMN's P/E Ratio Is Comparable to its Sector Average

Compared to the Basic Materials sector's average of 8.57, Eastman Chemical Company has a trailing twelve month price to earnings (P/E) ratio of 9.0 and an expected P/E ratio of 10.4. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($9.53) or forward earnings per share ($8.24).

Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Eastman Chemical Company's P/E ratio is near its sector average of 8.57, we can deduce that the market is fairly valuing the company's earnings.

EMN Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Eastman Chemical Company's P/B ratio of 1.9 is higher than its sector average of 1.86, such a margin of safety does not exist for the stock.

EMN Is Generating Cash

Eastman Chemical Company has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 4.0%, compared to 20.5% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of -1.8% and a coefficient of variability of 1.9%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 1,619 -578 1,041 -2.89
2020-12-31 1,455 -383 1,072 -0.65
2019-12-31 1,504 -425 1,079 n/a

Eastman Chemical Company's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Eastman Chemical Company's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Eastman Chemical Company's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 10,476 7,976 23.86 2.36
2020-12-31 8,473 6,498 23.31 -3.24
2019-12-31 9,273 7,039 24.09 n/a

Eastman Chemical Company's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 10,476 1,049 13.85 7.2
2020-12-31 8,473 880 12.92 -8.5
2019-12-31 9,273 925 14.12 n/a

Eastman Chemical Company's cost of revenue is growing at a rate of 7.5% in contrast to 7.2% for operating expenses. Sales revenues, on the other hand, have experienced a 7.5% growth rate. As a result, the average gross margins growth is -0.4 and the average operating margins growth rate is -0.6, with coefficients of variability of 1.7% and 4.6% respectively.

Eastman Chemical Company Benefits From Positive Market Signals

The market sentiment regarding Eastman Chemical Company is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $115 to $79. EMN is trading -7.78% away from its target price of $92.86. 1.7% of the company's shares are tied to short positions, and 87.7% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 15,175,933 2022-09-29 13% $1,299,666,892
JP Morgan Chase & Company 10,153,332 2022-09-29 8% $869,531,346
Blackrock Inc. 8,689,573 2022-09-29 7% $744,175,026
State Street Corporation 5,294,814 2022-09-29 4% $453,447,867
Morgan Stanley 3,912,818 2022-09-29 3% $335,093,731
Putnam Investments LLC 3,620,316 2022-09-29 3% $310,043,860
Geode Capital Management, LLC 2,480,444 2022-09-29 2% $212,425,222
Lsv Asset Management 2,141,639 2022-09-29 2% $183,409,962
Invesco Ltd. 2,117,408 2022-09-29 2% $181,334,819
Dimensional Fund Advisors LP 1,906,350 2022-09-29 2% $163,259,812
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.