09 February 2008

Eastman Chemical - EMN - A Zacks Top 10 for '08

Stock #7: Chemical producer finds formula for growth explosion. Emerging Asian markets are accelerating the demand for their chemical products. A new plant will help them ramp up production.

Here's a nice, concise overview of Eastman, from Morningstar:

Eastman Chemical is the world's largest producer of polyethylene terephthalate, a plastic used to make bottles, synthetic fibers, and other packaging products. The firm is also the world's second-largest producer of acetate tow, a key ingredient in cigarette filters. It is a leading supplier of intermediates used in the manufacture of coatings, plastics, and adhesives. Formerly part of Eastman Kodak, Eastman supplied chemicals to its parent until it was spun off in 1993.

I'm getting a whiff that EMN is a China play based on the Chinese adoration for cigarettes.

Can't you see it in his face? He smokes for the rich flavor--that undeniable taste.

The Telegraph recently reported that China is home to a third of the world's smokers. And they can get pretty feisty and rebellious when the government keeps 'em from getting their nicotine fix:

A sign of the passions the issue can raise has already been seen at the stadiums for next year's games. Earlier this month, an attempt by security guards to stop construction workers taking a cigarette break in a no smoking zone degenerated into a drunken brawl, with several workers injured.

The tobacco industry has also fought back. Zhang Baozhen, an industry official who is also a member of the National People's Congress, the parliament, has said that a ban could cause "social instability" - the Chinese leadership's greatest fear.

Morningstar has more details on Eastman's profitable, and growing, acetate tow business:

Eastman is the world's second-largest producer of acetate tow. Acetate tow is the key ingredient of most cigarette filters. This market's future remains promising--despite slowing tobacco use in North America--as the Chinese and European markets continue to be robust and manufacturers increasingly replace other filter materials with acetate tow. Global demand in this market is projected to grow at 3% per year through 2010, and new capacity additions look to be few and far between, making for a favorable global supply/demand outlook and Eastman's prospects in this lucrative business.

The firm's fibers segment, which encompasses acetate tow production, has earned an average return on assets of 28% over the past five years and has contributed about one third of the firm's operating earnings over the past two years. On a trailing two-year basis, the return on assets for Eastman's fibers segment has been about 10 percentage points higher on average than that of its next closest competitor, Rhodia. This tremendous outperformance can be attributed to the fact that the firm uses coal as its primary raw material in acetate production, which dramatically decreases total input costs.

According to SmartMoney.com, EMN has a high PEG of 1.90. Its dividend yield is about 2.67% (it pays a 44-cent quarterly dividend). The share price is pretty much midway between its 52-week high and low (EMN closed at $65.85 last Friday). EMN looks to be a safe, low-volatility (beta of 0.71) addition to a value portfolio. I would be more interested if the share price retreated toward $60.

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