There is a certain fun about following gurus’ actions, especially when their actions disagree. That has been the case between Andreas Halvorsen (Trades, Portfolio) and Leon Cooperman (Trades, Portfolio). The first was the largest shareholder with 5,784,190 shares, until selling 91% of the position in the open market last December. On the other hand, Cooperman increased his holding by 12% during the same period to a total of 2,070,781 shares. He is now the largest shareholder, followed by David Tepper (Trades, Portfolio) who joined as an investor during the last quarter of 2013. Another relevant investment has been Renaissance Technologies’ holding increment. Tepper and Simons however, hold positions around a fourth the size of Cooperman’s. Nonetheless, it is clear that gurus have seen something on Eastman Chemical (NYSE:EMN).
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- EMN 15-Year Financial Data
- The intrinsic value of EMN
- Peter Lynch Chart of EMN
What Is Going On?
At the end of January, Eastman Chemical published the Fourth-Quarter and Full-Year 2013 Financial Results. In it, CEO Mark Costa says, “Our outstanding results in 2013 represent the fourth consecutive year of strong earnings growth for Eastman.” In other words, and given that Halvorsen and Cooperman’s initial investment is date mid-2012, the decision to sell by the first can be interpreted as a collection of winnings, while the second’s opposite behavior is a display of confidence on continued growth. Either way, the overall positive performance achieved by the firm is never questioned.
Through the last for years, Eastman Chemical has indeed improved revenue, net income, and operating margins. Debt is considerably higher than four years ago, due to the acquisitions completed during 2012 but has always declined. And during the last fiscal year, only the Adhesives & Plasticizers saw a drop on sales revenue primarily due to lower selling prices for adhesives resins product lines and lower plasticizers sales volume. Nevertheless, all other four segments have seen improvements in sales revenue.
Costa closed the report stating that “We enter 2014 well positioned to benefit from specific actions we are taking across the company to increase earnings as well as balanced deployment of continued strong cash generation. We also face challenges, including increasing raw material and energy costs, particularly for propane, and continued economic uncertainty.” Some of those challenges are being addressed, let us see how.
Acquiring Is the Name of the Game
Eastman Chemical cannot control energy costs or configure a favorable macroeconomic environment. Management however, can take decisions to better position the firm in light of these difficulties. That is why during the first quarter of 2014 it moved forward with the acquisition of BP’s assets for the global aviation turbine engine oil business, and Commonwealth Laminating & Coating Inc. Both transactions will help the firm to better meet the global aviation industry’s needs and extends performance films global offerings.
Acquisitions have been accompanied by a policy for business restructuring that includes lowering exposure to economic cyclicality, geographical expansion focused in Asia, building of partnerships supported by acquisitions, and opening of new facilities. After two years in the making, the policy has begun to return positive results with the profitable results leaving room for improvement.
Currently trading at 11.4 times its trailing earnings, Eastman Chemical’s stock carries a 30% discount to the industry average. Hence, given past and expected performance it comes as no surprise that gurus are either collecting winnings or increasing holdings. Also, this is a good time for entering a long-term position as the macroeconomic conditions continue to improve and stock has yet to fully recover from the last drop. Last, be aware that cyclicality is high and that winnings can only be collected in the long run as the actions of the two largest shareholders show.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.