2023FY Financial Condition
Eastman Chemical reported having $14.6 billion in total assets, maintaining the same level year-on-year. The company had net property valued at $5.5 billion and goodwill amounting to $3.6 billion. The combined value of these, $9.1 billion, represented 62.3% of the total assets. This indicates that a significant portion of Eastman Chemical’s assets are tied up in long-term investments and acquisitions, highlighting the company’s strategy of investing heavily in fixed assets.
Additionally, the company’s total current assets were recorded at $3.5 billion. This relatively high level of current assets suggests that Eastman Chemical maintains a healthy balance of short-term assets to meet its immediate obligations. This asset composition reflects the company’s strategic focus on maintaining a robust portfolio of both tangible assets and intangible assets, like goodwill from acquisitions.
The company’s total current liabilities amounted to $2.58 billion, and its total liabilities were $9.1 billion. These figures indicate that Eastman Chemical has a substantial amount of both short-term and long-term debt. However, based on these figures, we believe Eastman Chemical’s liquidity was satisfactory. The current ratio, calculated as total current assets divided by total current liabilities, stands at approximately 1.36. This ratio suggests that the company has enough short-term assets to cover its short-term liabilities, indicating good liquidity.
When we exclude the amount of goodwill from the total assets, the debt ratio is found to be 82.2%. This adjusted debt ratio highlights the company’s significant reliance on debt financing. High debt levels can pose risks, especially in times of economic downturn or increased interest rates, but they can also indicate a company’s aggressive growth strategy. Eastman Chemical’s high debt ratio, after adjusting for goodwill, underscores the importance of understanding the nature of the company’s assets and liabilities when evaluating its financial health.
2023FY Operating Results
Eastman Chemical’s operating results for the fiscal year 2023 show some areas of concern. Sales were reported at $9.2 billion in 2023, compared to $10.6 billion in 2022 and $10.5 billion in 2021. The sales in 2022 remained flat year-on-year, which suggests a stagnation in revenue growth. However, the sales in 2023 saw a 13% decline, indicating a significant drop in revenue. This decline in sales is a critical point of concern as it may signal underlying issues such as decreased demand, increased competition, or operational inefficiencies.
The company’s gross profit was quite low, recorded at $2.06 billion in 2023, down from $2.14 billion in 2022 and $2.5 billion in 2021. The decline in gross profit mirrors the decline in sales and suggests that the company may be facing challenges in maintaining its profit margins. Gross profit margin, calculated as gross profit divided by total sales, can provide further insight. For 2023, this margin is approximately 22.4%, which is a decrease from the previous years, indicating reduced efficiency or increased cost of goods sold.
Net earnings were $896 million in 2023, compared to $796 million in 2022 and $867 million in 2021. Although there was a slight increase in net earnings from 2022 to 2023, the overall trend does not show significant growth. The company’s net profit margin, calculated as net earnings divided by total sales, was around 9.7% in 2023, which again points to low profitability. The lack of sales growth and low profit margins highlight the challenges Eastman Chemical faces in improving its operational efficiency and profitability.
2023FY Cash Flow Analysis
Net cash provided by operating activities was $1.37 billion in 2023, compared to $975 million in 2022 and $1.6 billion in 2021. This positive cash flow from operations is a good indicator of the company’s ability to generate cash internally to fund its operations, pay down debt, and invest in growth. Free cash flow, which is crucial for the valuation of a company, is calculated by subtracting capital expenditures from operating cash flow.
Eastman Chemical’s capital expenditure was $828 million in 2023, $616 million in 2022, and $555 million in 2021. Consequently, the company’s free cash flow was $547 million in 2023, $341 million in 2022, and $1 billion in 2021. The significant drop in free cash flow from 2021 to 2023 may raise concerns about the company’s ability to generate surplus cash after accounting for capital investments.
Dividends paid to shareholders were $376 million in 2023, $381 million in 2022, and $375 million in 2021. Treasury stock purchases were $150 million in 2023, and $1 billion in both 2022 and 2021. Essentially, the company returned all its free cash flow to shareholders through dividends and treasury stock purchases. While returning cash to shareholders can be a positive sign, indicating confidence in the company’s financial health, it may also limit the funds available for reinvestment in growth opportunities.
Eastman Chemical’s Operating Results for Q1 2024
In the first quarter of 2024, Eastman Chemical reported sales of $2.3 billion, compared to $2.4 billion in Q1 2023, showing a slight decline. This decrease in sales suggests that the company continues to face challenges in maintaining its revenue levels. Net earnings were $165 million in Q1 2024, compared to $134 million in Q1 2023. Despite the drop in sales, the increase in net earnings may indicate improved cost management or other operational efficiencies.
Conclusion
Eastman Chemical presents itself as a company with a strong focus on maintaining substantial fixed assets and making strategic acquisitions. However, the company’s operating results indicate some critical challenges. The significant decline in sales and gross profit over the past few years points to potential issues that need to be addressed to ensure sustainable growth. Moreover, the high debt ratio, after adjusting for goodwill, suggests a considerable reliance on debt financing, which can pose risks.
Despite these challenges, the company has shown positive cash flow from operations, which is a good indicator of its ability to generate cash internally. However, the decline in free cash flow over the years and the high return of cash to shareholders may limit the company’s ability to reinvest in growth opportunities.
Eastman Chemical’s stock price is $100.23 per share, equating to a market capitalization of $11.79 billion. Given the financial performance and the challenges highlighted, we estimate that the reasonable valuation of the company should be around $7 billion. This adjusted valuation takes into account the company’s current financial health, its operational challenges, and the market conditions. Overall, while Eastman Chemical is not a growth stock, it has the potential for stable performance if it can effectively manage its assets, improve profitability, and maintain a healthy cash flow.
Disclaimer: The content is for reference only and does not constitute investment advice.
Introduction
Eastman Chemical Company (“Eastman” or the “Company”) is a global specialty materials company that produces a broad range of products found in items people use every day. Eastman began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company’s photographic business and became a public company, incorporated in Delaware, on December 31, 1993. Eastman has 36 manufacturing facilities and has equity interests in two manufacturing joint ventures in 12 countries that supply products to customers throughout the world. See “Properties” in Part I, Item 2 of this Annual Report on Form 10-K (this “Annual Report”). The Company’s headquarters and largest manufacturing facility are located in Kingsport, Tennessee. With a robust portfolio of specialty businesses, Eastman works with customers to deliver innovative products and solutions with a commitment to safety and sustainability. Eastman’s businesses are managed and reported in four operating segments: Advanced Materials (“AM”), Additives & Functional Products (“AFP”), Chemical Intermediates (“CI”), and Fibers. See “Business Segments”.
In the first years as a stand-alone company, Eastman was diversified between commodity and more specialty chemical businesses. Beginning in 2004, the Company refocused its strategy and changed its businesses and portfolio of products, first by the divestiture and discontinuance of under-performing assets and commodity businesses and initiatives (including divestiture in 2004 of resins, inks, and monomers product lines, divestiture in 2006 of the polyethylene business, and divestiture from 2007 to 2010 of the polyethylene terephthalate (“PET”) assets and business). The Company then pursued growth through the development and acquisition of more specialty businesses and product lines by inorganic acquisition and integration (including acquisitions of Solutia, Inc., a global leader in performance materials and specialty chemicals in 2012, and Taminco Corporation, a global specialty chemical company in 2014) and organic development and commercialization of new and enhanced technologies and products.
