Eastman Chemical: Gross sales Volumes Want To Stabilize (NYSE:EMN)

I positioned a hold rating on Eastman Chemical Firm (NYSE:EMN) in July, stating that the corporate was not out of the woods, indicating extra uncertainty. The inventory has dropped 3.6% since July, in comparison with the S&P 500 Index (SP500) 0.08% drop. For the reason that article, the corporate has launched its Q2 earnings, which weren’t good. The corporate’s income continued to say no, though the tempo of decline ought to decelerate within the coming quarters. The corporate’s debt has elevated, and its dividend development fee could sluggish within the coming years. I had added to my holdings within the firm when it dropped beneath $80, yielding 4%. I’ve determined to pause after analyzing the Q2 earnings.

Though the corporate confirmed q/q enchancment in gross and working income in its June 2023 quarter, the financial system appears difficult. The inventory could have extra draw back as financial dangers multiply throughout the globe. New and present buyers could also be higher off ready for the value to drop beneath $75. The inventory’s 52-week low is $69.91. Given the uncertainties going through the corporate, it was the best name to slap a maintain score on this inventory in July and proceed that score now.

Gross sales volumes proceed declining

Eastman Chemical continues to see weak demand, which can final the remainder of the yr. Stock de-stocking continued throughout its buyer base in Q2 2023. Its gross sales have declined at a double-digit tempo during the last three quarters, and its pricing energy has light. Total gross sales volumes declined by 15% y/y in Q2 2023. When accounting for decrease costs and the impression of a robust greenback, income dropped by 17% (Exhibit 1). Gross income dropped by almost 15% and working income by 27% y/y in Q2, not signal. The silver lining is that the gross income improved sequentially Q/Q from $544 million in March 2023 to $584 million in June 2023. The corporate’s working earnings improved from $294 million to $342 million in the course of the quarters.

Exhibit 1:

Resilient working money flows

The corporate’s working money flows have been resilient regardless of declining gross sales. It generated $1.12 billion in operating cash flows over the previous 4 quarters and spent $777 million on capital expenditures throughout the identical interval. The corporate paid $373 million in dividend funds over the previous 4 quarters. Cap Ex and dividend funds consumed the corporate’s working money flows over the previous 4 quarters. The corporate’s trailing twelve-month EBITDA was $1.58 billion. That places the debt/EBITDA ratio at 3.4x, a excessive quantity, particularly if the worldwide financial system enters a recession.

Given the calls for on the corporate’s working money flows, it’s no marvel that the corporate’s complete debt elevated over the previous two quarters. The corporate’s long-term debt went from $4.02 billion in December 2022 to $4.6 billion as of June 2023. The entire debt stands at $5.5 billion

Recession worries linger

The corporate famous that de-stocking would sluggish within the coming quarters. Shoppers have held up nicely within the U.S. and Asia within the face of excessive inflation and rates of interest. However, the U.S. could also be coming into a protracted sluggish development period in the long run and a recession within the quick time period. With rising oil costs, there are renewed fears of inflation working greater than the Fed’s 2% goal for for much longer. The development sector is already in a recession, and the strikes on the Large 3 automakers in Detroit add to the financial uncertainty. Many debtors have stretched their price range with $ 1,000 month-to-month funds on their automotive loans. At these ranges of month-to-month funds, many Individuals will probably be left with restricted or no discretionary spending energy, additional impeding financial development. Additionally, the Federal Authorities could endure a shutdown because of the ongoing price range battle within the U.S. Congress. Let’s not overlook that 43 million Americans will face renewed monetary stress because of the resumption of pupil debt repayments.

It has dividend yield at present costs however appears totally valued

The inventory yields a formidable 4% because of the latest efficiency of the inventory. The dividend payout of 47% is a tad excessive, given the corporate’s state. The corporate has grown its dividend at a 7% CAGR over the previous 5 years. Nonetheless, the corporate could wrestle to extend its dividend over the subsequent couple of years because of the stress on its free money movement and debt ranges. The corporate continues to spend cash on share buybacks. Since its working money flows are utilized in capital expenditure and dividend funds, it borrows cash to fund its buybacks.

In 2021 and 2022, the corporate spent $1 billion yearly shopping for again shares. Over twelve months, that firm has spent $300 million on buybacks. The corporate carried $410 million in money and short-term investments on the finish of Q2 2023, a drop from $494 million on the finish of 2022. Firms will need to have a robust steadiness sheet within the face of financial uncertainty. The addition to the corporate’s debt load and its discount in money must be a priority for buyers, albeit not a giant one at the moment, but when gross sales deteriorate additional, it may spell extra bother.

The inventory appears totally valued based mostly on a ahead EV/EBITDA a number of foundation, buying and selling at 8.7x, in comparison with its five-year common of 8.5x. The sector median EV/EBITDA a number of is 7.9x.

Eastman Chemical’s dividend could need to develop at a low-mid-single-digit tempo over the subsequent couple of years. Pessimistically, it could be caught at present ranges for some time. However a present 4% yield is appropriate for long-term buyers if it grows upwards of 5% when the financial system recovers. The corporate could sluggish its share buybacks drastically within the coming quarters because it searches for extra free money movement. Each analyst protecting the inventory has lowered their EPS estimates for Q3 over the previous ninety days.

Though I personal Eastman Chemical, it could have been prudent to attend, given the financial headwinds and the rising prospect of the U.S. financial system slowing down additional. I’ve paused my purchases and await indicators of stabilizing gross sales volumes, income, and income. I’ll watch the balance sheet to make sure the corporate doesn’t add extra debt within the coming quarters. On account of these causes, I proceed to fee Eastman Chemical a maintain.