Friday, October 29, 2010

Bookkeeping: Starting Eastman Chemical (EMN)

One group I've completely missed on this run from late August are the chemical companies - not my usual area to play in, but a deeply cyclical group benefiting from many of the multinational trends I've outlined in countless pieces.  A lot of these multinational names are starting to show fatigue, so I am doing any purchase between here and "the next correction" with tight stops since I am seeing a narrower market in many ways ... while people continue to pile into some names at any price, a lot of stocks are actually beginning to break down.  So consider buying anything long at this point as something I am doing with gun (bazooka in Bernanke's case) to head.   And I'll be out in a jiffy as there are huge air pockets below so many stocks now.

Eastman Chemical (EMN) is a new name to the portfolio, and this is the first time I've ever bought it.  It has had a monster run for a 'slow money' type of stock, up some 20% since late August - even after this recent small pullback.   This is a $5.6B company that is more or less your typical diversified chemical producer.

Eastman Chemical Company engages in the manufacture and sale of chemicals, plastics, and fibers in the United States and internationally. The company operates in five segments: Coatings, Adhesives, Specialty Polymers, and Inks (CASPI); Fibers; Performance Chemicals and Intermediates (PCI); Performance Polymers; and the Specialty Plastics (SP).

Is it trading at 10x earnings on the year but with cyclical companies, always tough to buy on valuation since you normally want to buy when they are 'rich' and sell when they are 'cheap', due to the cyclical nature of EPS.  Obviously commodity costs are the big thing here - many chemical processes use nat gas as an input so the bear market in that one commodity is a big benefit, and then on the other side of the equation, pricing power is important.... if they can pass along higher prices, margins expand and we're all happy.   If not, we're not happy.

In terms of geography the company is still North American dominant but does have good Asian exposure and even some Latin American - obviously one would prefer those two dominate but here is the revenue breakdown for the quarter

  • US/Canada $946M
  • Asia Pacific $369M
  • Europe $291M
  • Latin America $123M

The fundamental picture is bright in terms of the earnings report it offered yesterday, and the technical picture is solid (but could turn on a dime).  As the stock pulls back to the 20 day moving average, I have begun a 2.2% exposure.  If this level breaks, I will have a tight stop because that gap down at $67.50 (mid September) scares me - indeed I might go short the name if the overall market finally relents.

With my entry in the $78.20s I'll give this about a 2.5% berth, or downside to the low $76 area for a stop loss.  Rather than chasing momo stocks, I actually prefer to buy charts like this where you have a breakout and a small pullback to support.  This way I have a line in the sand where a tight stop loss can get me out if I am wrong.  But I seem to be in the minority nowadays as "buy whatever is up 6% so I can sell it to someone tomorrow ever highr" is the prevalent trend among silicon and carbon based traders.

(full report here)

An overview of the earnings report, via Reuters

  • Eastman Chemical Co (EMN) said its quarterly profit rose 68 percent to beat expectations as sales of packaging and plastics jumped.  Demand for Eastman's products continues to rebound around the world, and the company estimated fourth-quarter profit in a range that is mostly above analysts' consensus forecast.
  • "Other than normal seasonal declines, we expect strong volumes will continue across the company and in all regions," Chief Executive Jim Rogers said in a release.  Rogers warned, though, that higher raw material costs could squeeze margins in the fourth quarter.
Financial data:
  • For the third quarter, Eastman posted net income of $170 million, or $2.33 per share, compared with $101 million, or $1.38 per share, in the year-ago period.  Analysts expected earnings of $2.23 per share, according to Thomson Reuters I/B/E/S.
  • Revenue at the Kingsport, Tennessee-based company rose 29.3 percent to $1.73 billion. Analysts had expected $1.71 billion.  Sales spiked in all units, including specialty plastics, which makes Tritan, a brand name plastic used to make drinking water bottles and related items.
  • For the fourth quarter, Eastman forecast earnings of $1.40 to $1.50 per share. Analysts expect earnings of $1.41 per share for the period.
Long Eastman Chemical in fund; no personal position

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