4 Reasons RBC Downgraded Eastman Chemical

RBC Capital Markets downgraded Eastman Chemical Company EMN to Sector Perform from Outperform, mainly on sluggish downstream pricing and disappointing tow performance.

"These are two of the pillars we built our original long-thesis on back in the Fall of 2015 and they have not held up to expectations. We step to the sidelines and await more clarity on timing and severity of the price war in tow," analyst Arun Viswanathan wrote in a note.

Following are four reasons why Viswanathan downgraded the stock:

1) "Deteriorating tow prospects"

2) "Weak merchant ethylene"

3) "Sluggish downstream pricing"

4) "Limited near-term catalysts"

Viswanathan noted Eastman has the most exposure to acetate tow destocking headwinds out of China. The analyst expects earnings from the tow business be down as much as 10-20 percent year-over-year in 2017 given persistent volume declines and now deteriorating pricing prospect.

Further, the analyst added that EMN's merchant ethylene position was affected due to weaker than expected ethylene prices during the heavy US maintenance season. In addition, EMN's downstream pricing power is being hurt by low global energy and raw material prices.

Viswanathan cut his EPS estimates for Q3/2016/2017 to $1.65/$6.55/$7.00 from $1.85/$6.90/$7.55 to reflect management's new guidance of down 10 percent for FY 2016.

The analyst noted that though the stock is off 15 percent in the last three months, he warned against putting fresh money on Eastman.

Shares fell 2 percent to $63.87. The analyst has cut the price target to $70 from $83. Still, the revised target price represents a potential return of 10 percent based on Monday's close.