JPMorgan Steps To The Sidelines On Eastman Chemical

The case for being bullish on Eastman Chemical Company EMN can no longer be justified due to contracting volumes and prices across Eastman's business portfolio, according to JPMorgan.

The Analyst

JPMorgan's Jeffrey Zekauskas downgraded Eastman Chemical from Overweight to Neutral with a price target lowered from $88 to $80.

The Thesis

Eastman continues to reduce its internal propylene production by around 330 million pounds to 220 million in 2019 and could replace the shortfall with refinery grade propylene that it could upgrade to polymer grade, Zekauskas wrote in a note. The reduction in activity should put some pressure on the company's valuation over the coming months from the risk of operational shortfalls in a low volume environment.

Granted, the analyst said Eastman's cash flow generation for 2019 could come in at more than $1 billion which is more than 10% of the Eastman share price. This suggests an appealing investment thesis for the longer-term but the near-term outlook is less bullish.

Instead, investors may opt for investing in Celanese Corporation CE as the company hopes to grow its already "good" margin integrated U.S. operations and better positioning itself against higher cost Asian acetyl production. Celanese also boasts superior financial leverage and a more open view on growth through acquisitions, joint-ventures, marketing arrangements, or even through a transformational transaction.

Price Action

Shares of Eastman Chemical were trading lower by 0.5% at $77.25 Monday afternoon.

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