EFTA01462031

Deutsche Bank Markets Research Elating Buy North America United States Industrials Chemicals / Specialty na pony Eastman Chemical EMN N PAN UN NYS EMN Share Price Decline Unwarranted Concerts; overdone. Valuation compelling at 1O 1EE vs Do:: at 14 tihi Bav Eastman shares fell 8% despite a solid 02 beat and the reaffirming of '14 guidance as investors focused on i) new '15 guidance of $7.50-$8.00 (vs $8 previously) and ii) a lowering of '14 Fibers (largest and highest margin segment) EBIT guidance by 6%. We believe investor concerns are overdone as i) Eastman has been backing away from the $8 target for months and, as evidenced by consensus of $7.77, was not viewed as achievable either and ii) Fibers is under-earning in '14 due to destocking, lower demand and reduced operating rates. With valuation a compelling 10.6x '15 EPS vs 14.8x for Dow and Q2 evidencing a more predictable and resilient earnings generator, Buy. O2 bears by $O U. " 14 guidance of 56.70-37 .00 rear firmed (cons. 36 931 Eastman reported Q2 EPS of $1.92, up 7%, and $0.08 or 4% above consensus. An unplanned outage at Eastman's Kingsport plant reduced sales by $10MM (in Specialty Fluids & Intermediates {SFI)), EBIT by S10MM (evenly divided between Advanced Mat'ls, Fibers and SFI) and EPS by $0.05. Prior to the outage, consensus was $1.88. A lower than expected tax rate added $0.01. The upside was driven by stronger than expected results in Adhesives & Plasticizers (AP) and SFI. Sales rose 1% on flat volumes and price while FX added 1°!.. EBIT fell 3% to $441MM while margins compressed 70bps YoY (+130 000) to 17.9% on higher propane costs. Eastman repurchased $100MM of stock in 02 and has $640MM left under its $16 authorization. Eastman reaffirmed its full year guidance range of $6.70-$7.00, up 4-9% (cons: $6.93). Loyieting 145 EPS by 0.05 to 36.90. Lowe' ins '155 EPS by SO OS to $y.70 Notwithstanding a solid Q2 release, Eastman shares fell 8% due to concerns over lowered '15 EPS and '14 Fibers guidance. Another driver, in our view, was the wide $0.30 guidance range for 2H14 as it implies a high degree of volatility in Eastman's business. A slight narrowing of the range to 56.75-$6.95, in our view, would have alleviated this concern. For 2H14, we expect slightly lower EPS for Eastman due to destocking in Fibers, a slowdown in heat transfer fluids (China) and a planned outage at the company's largest ethylene cracker in Longview, TX ($20MM, or $0.10 impact in Q4). Looking ahead to '15, we believe Fiber earnings will recover modestly post destocking and lower plant operating rates in '14. While we concur with Eastman's view that Fiber earnings are plateauing, we believe EBIT will be higher in '15 at -$500MM vs the depressed level of $480MM in '14. And with EBITDA of $550MM and capex of just $50MM. Fibers should be strong source of cash to fund growth (M&A, buybacks). For all of '15, we believe Eastman has a number of tailwinds that should drive earnings well above $7.50 including: normalized operations (outages/turnarounds: $0.20), lower propane costs ($0.15-$0.20). acquisitions ($0.10-plus), base business growth ($0.35) and share buybacks ($0.20). To reflect lower Fibers earnings, we are trimming our '14E EPS by $0.05 to $6.90, up 7% and our '15E by $0.05 to $7.70 up 12%. Date 29 July 2014 Results Price at 29 Jul 2014 (USD) 81.57 Price target 100.00 52-week range 90.20 - 72.67 Olivia Ow:0*A Research Analyst 411 212 250-5473 daykl.begleiteredb.com FIJITomin Research Associate (+I I 212 250-8619 [email protected] .idle I I int! 0r.)..vil Research Associate I+ I) 212 250-3624 [email protected] 105 SO 75 n. •a*r tii:#41.(ad7 z ant VIZ 8.12 1n3 603 2111 sesouro 0•11.10.1 S&P 00011400C Oleteson Performance PM lm 3m 12m Absolute -6.7 -5.4 8.6 S&P 600 INDEX 0.6 4.9 16.9 Source DetOorre as Target price of-ST00 Our $100 target price is based on Eastman trading at 13x '15E EPS in 12mos, a 12% discount to its differentiated chemical peer Dow. Risks: weaker tire demand, increased leverage and the Solutia integration. Year End Dec 31 2013A 2014E 2015E FY EPS (USD) 6.44 6.90 7.70 Sour. Onto'. Bank avower, moon ore Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0 124378 SDNY_GM_00270562 EFTA01462031