On Feb 2, we issued an updated research report on Eastman Chemical (EMN). While the chemicals maker should benefit from its strategic acquisitions, capacity additions and cost-cutting measures, it is exposed to volatile raw material pricing and currency headwinds.

Eastman Chemical’s diversified chemical portfolio, along with its integrated and diverse downstream businesses remains its strength. It is gaining from synergies of acquisitions and cost-cutting measures.

The acquisition of Solutia represents a major step in Eastman Chemical’s strategy to boost its foothold in the emerging markets, especially in Asia Pacific. Moreover, the acquisition of BP Plc’s (BP) aviation turbine engine oil business will enable Eastman Chemical to better address the needs of the global aviation industry. 

The recently completed purchase of specialty chemical company Taminco Corporation for $2.8 billion will also fortify the company’s foothold in attractive niche end-markets including food, feed and agriculture where Taminco has a strong presence. Eastman Chemical expects the Taminco buy to be accretive to its earnings (barring acquisition-related costs and charges) for 2015 by more than 35 cents per share.

Eastman Chemical should also gain from capacity additions. The acetate tow manufacturing facility, the company’s joint venture investment in China, is now in operation and producing commercial quantities. Moreover, Eastman Chemical is seeing strong adoption of Tritan copolyester product line and it is increasing Tritan capacity at its Kingsport facility. It is also expanding capacity for its Therminol heat transfer fluids. 

However, Eastman Chemical remains exposed to volatility in raw material costs (particularly for propane) and pricing pressure. The company is also exposed to currency headwinds given the strengthening of the U.S. dollar vis-à-vis a basket of currencies, especially euro. It sees 25 cents to 30 cents per share currency-related earnings headwind in 2015. 

Moreover, uncertainty regarding the timing of a recovery in Europe remains a concern. Automobile as well as commercial construction markets still remain soft in the region.

Eastman Chemical is also expected to see lower demand for acetate tow in first-half 2015 due to inventory destocking by customers. Moreover, falling oil prices and lower anticipated demand in heat transfer fluids are expected to affect the company’s specialty fluids and intermediates business in 2015. The company is also witnessing competitive pressure in its Adhesives and Plasticizers segment. 

Other Stocks to Consider

Other companies in the chemical industry worth considering include Compass Minerals International Inc. (CMP) and Innophos Holdings Inc (IPHS), both holding a Zacks Rank #1 (Strong Buy).