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Eastman Chemical: Another Legacy of George Eastman
Posted by: Anh Hoang (IP Logged)
Date: December 25, 2011 12:46AM

Nobody knows what would happen in the future. The great business with a wide moat around might gradually decay and collapse over time. It might be because of the industry restructuring, or because of the management’s screw-ups over a long time, etc. The very common examples we see is in the technology field, where the Internet came along and droves out the moat of the great newspapers, and the digital camera came along to drive out one of the photographic business which used to be considered one of the best business in the world. That is Eastman Kodak. Whenever Eastman is mentioned, anyone would automatically think of Eastman Kodak, but not lot of people would mention another business of his, Eastman Chemical (EMN). The interesting thing to note here is the two connected business, one is on the verge of going to disappear, and the other is thriving over time. With the different approaches to business, even though Kodak has experienced a free fall, losing 99% of its market value to only $185 million, Eastman Chemical has approached the market value of $5.5 billion.

Eastman Chemical was established back in 1920 with the purpose of supporting Eastman Kodak, to produce chemical for photographic business. It produces and sells a board portfolio of chemicals, plastics, and fibers. Now, EMN has 16 manufacturing sites in nine countries to deliver to customers around the world. In the interview with former executives, the two companies were operating in opposite ways. While Chemical Company has expanded in many new markets, Kodak rested on its success for too long. And while Chemical had the executive management who worried about the profitability of the company all the time, Kodak still retained the good employee benefits even the moat has gradually be eroded away.

The example has been given when in March 2009, Eastman Chemical asked all employees from the CEO down to have 5% cut to prevent big layoffs. And the whole company members join force together, it has worked out, layoffs were averted and the original pay levels were restored later in that year. Brian Ferguson, the CEO from 2002 – 2009 of Chemical said: “We had difficulties dealing with these issues due to the paternal history of Kodak, which implied employment for life, benefits forever unchanging and general conflict avoidance.” In contrast, Kodak was very generous with its employees which increased the cost of operating. The company has faced a massive layoff. In 1998, it got 86,000 workers globally, now just around 18,800.

Talking financial, EMN experienced the continuous profitability since 2004, whereas for the last 10 years it generated consistent positive operating cash flow as well as free cash flow.

USD millions 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net income -179 61 -270 170 557 409 300 346 136 438
CFO 431 801 244 494 769 609 732 653 758 575
FCF 197 374 14 246 426 204 203 9 448 332
On the 10 year average, the operating cash flow of EMN is around $600 million, whereas the cash flow is $245 million. At the market value of $5.5 billion, it valued EMN at 10x cash flow and nearly 3x the book value.

The company has taken quite large amount of long-term in its balance sheet, with the latest outstanding figure of nearly $1.5 billion, and the pension liabilities netted $1.3 billion, pushing the total liabilities of nearly $4.3 billion. Out of the long-term debt, only $151 million is due next year, in around 3 years interval from 2012, majority of notes or debentures would be due at the similar amount of $250 million. So the debt does not pose the solvency risks for EMN, especially with the current consistent cash flow generation situation. Furthermore, the company kept repurchasing shares overtime, the treasury stock has reached $1.9 billion in the latest quarter, pushing the equity level down to just nearly 31% of the total asset. The consistent cash flow generating machine is the foundation for any investors to believe in the continuation and sustainability of its dividend payment over time. EMN got the history of consistent dividend, and the dividend is yielding 2.7%.

In short, EMN seems to be suitable for income investors, and value investors which prefer consistent performance overtime, not relying on any single key patents or technology like its previous parent, Eastman Kodak. Personally, I would prefer it might go lower for me to initiate the position, but at the current valuation compared to its historical performance, the investors might buy the stock in, receive the dividend and reinvested the dividend to accumulate the compounded growth.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.



Stocks Discussed: EMN,
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