Eastman Chemical (EMN)
Dividend Growth Stock Driving Sustainability Through Innovation and Resilience
Investment Highlights
Circular Economy Leader: Eastman’s advanced recycling technologies, like CRT and PRT, position it as a sustainability pioneer in addressing plastic waste.
Strategic Growth Initiatives: New recycling plants in Tennessee, Texas, and France are expected to add over $500M in EBITDA by 2029 with strong ROIC.
Diverse Sustainable Portfolio: Products like Tritan™ Renew and Naia™ Renew target high-growth markets in consumer durables, textiles, and packaging.
Financial Recovery Underway: EBIT margins are improving, with EBITDA projected to grow 8.3% CAGR through 2029, driven by new projects and operating leverage.
Shareholder-Friendly Returns: A 15-year streak of dividend increases and 2.5% annual share buybacks reflect Eastman’s focus on returning value to investors.
Pricing Power in Sustainable Plastics: CRT-derived PET commands a premium for its quality and eco-credentials, supporting margin resilience.
I do not own EMN and am not currently considering an allocation.
Company Snapshot
8.6% TTM Free Cash Flow Yield
11.4x NTM P/E
Dividend Yield: 3.28% with a 42% payout ratio
$11 billion market cap
9.2x LTM EV/EBITDA
Eastman’s Circular Economy Initiative
The urgent need for sustainable and recyclable materials has become a global crisis. With 360 million metric tons of plastic waste produced annually, and only 9% recycled, the environmental impact is staggering. More than 70% of plastic waste ends up in landfills or the natural environment. This alarming statistic underscores the urgent need for innovative solutions to reduce plastic pollution and promote a circular economy.
Mechanical recycling is inefficient due to:
Quality degradation with each cycle
Low yield back to food grade status
Requirement for very clean sources of feedstock (input)
Eastman Chemical Company is at the forefront of this movement, developing cutting-edge technologies to transform waste into valuable resources. By pioneering molecular recycling and circular economy initiatives, Eastman is not only reducing environmental impact but also driving sustainable growth and innovation for investors.
Closing the Recycling Loop
Mechanical recycling can only process Plastic Types #1 and #2 below. Eastman’s molecular recycling technology, especially the Carbon Renewal Technology (CRT), can process all of it.
With 70 years’ experience as a PET producer and 30 years in methanolysis (molecular recycling), Eastmain is uniquely suited to provide these solutions. As I explain later, this technology may become a large driver of its future growth.
Company History
Founded in 1920, Eastman is a global specialty materials company that produces a broad range of products found in items people use every day. With the purpose of enhancing the quality of life in a material way, Eastman works with customers to deliver innovative products and solutions while maintaining a commitment to safety and sustainability. The company’s innovation-driven growth model operates with leading positions in attractive end markets such as transportation, building and construction, and consumables.
Eastman has operated as a company for more than 100 years and now has raised its annual dividend consecutively for the last 15 years. It is well diversified and generates 59% of its revenue outside the United States. The company sports 15% operating margins, repurchases about 2.5% of its stock annually, and management is currently guiding to an LTM free cash flow yield of about 8.5% excluding growth capex.
Overview of Product Lines
The company offers its products under four different operating segments.
1. Advanced Materials
This segment focuses on specialty plastics, interlayers, and performance films used in a variety of high-end applications.
Tritan™ Renew: A specialty polyester made with molecularly recycled feedstock. It aligns with Eastman’s sustainability goals and serves markets like consumer goods, including products for Procter & Gamble, L’Oreal and NutriBullet®.
Saflex™ and XIR® Interlayers: Advanced materials for automotive and architectural applications. Saflex interlayers provide acoustic, solar, and safety properties for vehicles, while XIR enhances solar control in glazing.
SunTek® Reaction and LLumar® Valor: Paint protection films incorporating advanced resin systems for self-healing and protective qualities.
Tetrashield™: A resin technology enhancing durability, reducing potentially hazardous ingredients and eliminating energy-intensive manufacturing steps in the coatings of various products.
EastaPure™: Ultrapure chemicals designed for semiconductor manufacturing, critical for high-tech applications like AI.
2. Additives & Functional Products
This segment develops performance-enhancing additives and coatings for a variety of applications.
Core Digital Platform: A subscription-based service for the automotive film market, improving efficiency and profitability for installers and dealers.
Fluid Genius™: An AI-powered monitoring platform for heat transfer fluids, prioritizing safety and operational efficiency.
3. Chemical Intermediates
A core supplier of building-block chemicals that support downstream production, particularly for specialty chemicals.
Products like EastaPure™ originate here as precursors before their transformation into higher-value advanced materials.
4. Fibers
This division focuses on cellulosic materials, particularly for textiles and specialty applications.
Naia™ Renew and Naia™ Staple Fibers: Sustainable textiles made with recycled content, adopted by brands like Hugo Boss and Patagonia. These fibers are biodegradable and have certifications like marine biodegradability.
Aventa™ Renew: A compostable material ideal for food service packaging, replacing polystyrene foam trays with a fully circular solution.
Acetate Renew: A cellulose-based material for luxury eyewear and sunwear frames, combining biobased and molecularly recycled content for sustainability.
Cellulosic Materials for Cosmetics: Biodegradable esters designed to replace microplastics in beauty products.
Eastman’s Growth Strategy
The company has increasingly focused its strategy for growth on its circular economy leadership.
“We are transforming the plastics industry by creating solutions that enable a circular economy for plastics where waste is minimized, and materials are reused and recycled. We are doing this by leveraging our unique molecular recycling technologies, which allow us to convert plastic waste into high-performance, high-quality products.” — Eastman 2023 Annual Report
Kingsport Facility
During 2023, the company completed its first methanolysis facility, the largest in the world, in Kingsport, Tennessee. The facility will use methanol to break down hard-to-recycle waste polyester and plastic into intermediate monomers that Eastman can use to make more than 200,000 metric tons of new polymers per year. Eastman will use these polymers to primarily grow its Advanced Materials business in durables and packaging.
Using methanolysis is much more energy efficient than using fossil fuels to manufacture materials like PET. Customers are paying a premium for its high-quality recycled material over mechanically recycled PET and virgin PET from fossil fuels.
I can envision a risk where customers may switch to cheaper PET made from fossil fuels as feedstock in an environment where cost cutting is prioritized. Currently, customers see value in the sustainability credentials of CRT-derived PET.
Other New Facilities
One of the largest of its kind in the world, the Kingsport plant possesses a first-mover advantage in the space and now represents Eastman’s flagship site. Eastman is also in the process of opening several other plants that will integrate its molecular recycling technologies with its four product lines.
Longview, TX: Scale Polyester Recycling Technology (PRT) used to recycle hard-to-recycle plastics. Up to $425 million of government support.
France: The Longview plant will export some volume to Europe and create “bridge volume” for the future plant in France.
Growth Economics
Management is very thoughtful and calculated in its capital allocation to new growth. The company only takes on projects in which they have confidence of at least a 12% return on invested capital (ROIC).
The Kingsport plant is online and operating today and Eastman estimates a stabilized ROIC of 15%, and at least $200 million of EBITDA generation. The Longview plant should be complete by 2028 and is expected to generate at least $150 million of EBITDA at full ramp-up.
An example of the thoughtful capital allocation can be seen in its comments on the Texas project. Eastman waited to go forward with this plant after inking a multi-year agreement with Pepsi for significant volume at the plant. It leveraged a brownfield site to reduce execution risk and went under contract with the Department of energy for a DoE grant.
The project in France will execute once Eastman achieves sufficient long-term contracts for this facility and it makes further progress on regulatory matters.
Cellulosic Biodegradable Platform
In addition to the PRT, another exciting growth initiative is the cellulosic biodegradable platform, which adds a sustainable end of life alternative to several attractive markets in the Fibers product line. The company uses its CRT to serve multiple markets. This line also appears to be the most profitable with implied operating margins of around 33%.
Eastman estimates this platform has a total addressable market (TAM) of at least $2.4 billion across textiles, packaging, food services and personal care.
Management projects the cellulosic platform applications have potential to generate $150-200 million of EBITDA by 2029. The company has already launched into 4 new applications since 2021 and has another application in development currently. Products like Aventa Renew are growing rapidly and expected to contribute to significant revenue potential over the next 3-5 years.
Eastman expects to spend $200-300 of capex on the platform from 2025-2029 to generate an expected EBITDA of $150-200 million by 2029. If achieved, this represents a return on investment of about 60-75% annually.
Competitive Advantages
The company engages attractive niche markets by working directly with customers and downstream users. It uses differentiated application development with these customers to convert market complexity into opportunities for its customers, enabling a deeper understanding of Eastman’s products. This approach makes Eastman stickier to its customers resulting in more sustainable earnings growth and cash flow.
Eastman has remained competitive through a specialty (versus commodity) focus, maintaining profit margins over the past 5 years as seen below.
Financial Performance
Signs of Inflection
Eastman experienced financial underperformance in late 2022 and early 2023 primarily due to weak demand across its key markets, such as consumer durables and building/construction. Significant customer inventory destocking exacerbated the issues.
Despite the headwinds, management took advantage of this time to remain disciplined on pricing, reduce costs, and also invest for growth through restructuring and its circular economy initiatives. Over the last couple of quarters, management continued to make progress by increasing EBIT margin by 360 basis points YoY, returning to historical levels.
The company estimates it will exit 2024 with an EBITDA of $1.75 billion, equating to an EV/EBITDA multiple of 9.35x for LTM. It sees a normalized EBITDA of $2.1 billion as sales volume returns to pre-COVID levels from 2019, and $2.6 billion EBITDA by 2029 from its investment in new projects.
Looking on a quarterly basis we can see the inflection higher in revenue and also slightly in operating margins. Eastman expects this to increase due to better fixed cost leverage established over the last couple of years.
Current Estimates
Analysts currently estimate adjusted EPS of $8.67 for 2025 giving a forward P/E ratio today of 11.5x. This is a good entry point for a company that has operated for more than 100 years with 15 years of consecutive dividend growth. As you see below there is an indication of the benefit from its fixed operating cost leverage with EPS expected to grow at 13% over the next 2 years versus 4-5% of revenue growth.
Eastman projects EBITDA growth over the next 5 years of about 8.3% CAGR, to $2.6 billion from $1.75 billion due to:
Return to normalized sales after a year of customer destocking
Additional growth from its investment in CRT and PRT plants
Margin expansion from lower fixed operating costs
Stock repurchases of about 2.5% of shares per year
Risks
Lower valuations are great but sometimes a stock trades lower for good reason, not just an overlooked opportunity.
Cyclical Customer Exposure
Eastman sells its products and services to customers that predominantly operate in cyclical industries such as consumer durables, automotive, and packaging. This exposure is certainly a risk to consider yet I like where the company stands today seeing a tailwind coming from the end of customer inventory destocking.
Defined Benefit Pension Plan
Eastman has a defined benefit pension plan that it excludes from adjusted EPS. The company has managed it very well over the years, but it is worth noting that this does have an impact on its earnings. Employees hired after January 1, 2007 are not eligible to participate in the plan. An item such as this is difficult to predict and funded status will oscillate with markets year-to-year. However, its well-managed status limits significant risk to earnings.
Execution Risks and Competition in Molecular Recycling
The company is an early adopter of advanced recycling technologies, but it faces increasing competition from other chemical companies investing in sustainability initiatives. Competitors such as BASF, Dow Chemical and LyondellBasell are pursuing circular solutions as well.
Regulatory and Political Risks
Eastman’s growth depends heavily on global sustainability policies and incentives to encourage circular economy adoption. Changes in regulations, slower implementation of incentives, or differences in regional policies could negatively affect Eastman’s circular economy projects.
Historical ROIC
EMN has shown a lower ROIC historically than I would like to see, sometimes dipping below double-digit returns. If I see signs of success in the targeted ROIC for these new projects I may reconsider the stock.
Conclusion
I decided to share my analysis since I spent time researching Eastman. I do not currently own EMN and am not actively considering an allocation. I believe the company has good growth prospects but that there are likely better risk-adjusted returns available. I will continue to monitor the business to see how it progresses with its growth initiatives.
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Disclosure: This information is provided for informational purposes only and should not be considered a solicitation or recommendation to buy or sell any securities. The author or entity providing this information may hold positions in the securities discussed. This is not investment advice.