SunTrust On Eastman Chemical: 'The Horse Has Left The Barn'

SunTrust kept its Neutral rating on Eastman Chemical Company EMN despite its lackluster performance in the second quarter amid compressing olefin spreads, competitive pressure from Asia and low filter tow volumes.

Eastman Chemical posted second quarter EPS of $1.68, down 16 percent and $0.05 below consensus. The company now expects 2016 EPS of about $6.55, versus $6.91 previously. This is 6 percent below prior consensus of $6.95.

"The lowered outlook reflects: 1) competitive pressures in Asia caused by low oil prices, weak demand and a strong dollar (each benefiting competitors' cost positions), 2) compressing propylene and ethylene spreads, and 3) falling Chinese imports of filter tow (impacts EMN disproportionately)," analyst James Sheehan wrote in a note.

Moreover, Eastman Chemical management believes it can deliver 8-12 percent EPS growth in 2017, helped by a $0.30 benefit from expiring propane hedges and $0.50 from new cost cutting.

However, the analyst expects Fiber segment earnings to decline 19 percent to $315 million followed by another 15 percent drop in 2017 as competitors deploy aggressive pricing tactics.

To account for weakness in Intermediates in the second half of 2016, the analyst cut its 2016 EPS estimate by $0.38 to $6.52. To reflect lower Fibers earnings and the lowered 2016 base, Sheehan also slashed his 2017 EPS estimate by $0.43 to $7.21.

"We expect EMN's discounted valuation to persist until commodity spreads rebound, differentiated chemical earnings pick up the slack for Fibers and Intermediates, or macro tailwinds pick up. With valuation at 7.8x 2016 EBITDA, Neutral," Sheehan added.

The analyst has a price target of $66.