Trade tensions seem to have finally caught up to the market, as the last week has prompted investors to start selling. Despite today’s rally, the S&P 500 is off about 2.2% from a high point around 2,788 earlier this month. Those tensions have particularly followed U.S. stocks that do a significant portion of business overseas, and even more specifically those with major exposure in China. EMN fits that description; as of March of this year, the company estimated that 28% of its business came from the Asia/Pacific region, with the lion’s share of that business in China. That has pushed the stock off of its all-time highs around $110 in the last couple of weeks to its current price. A drop of about 10% in price marks a significant retracement and correction of the stock’s long-term trend, which is still more than 50% higher than it started a year ago. The stock is approaching an important support level that could mark a major turning point for investors.
I think that despite the stock’s getting solid fundamental profile, and recovery to the stock’s previous highs is anything but a given, especially given the preference shown so far by both the U.S. and its trading partners to escalate trade tariffs. The market abhors any kind of conflict that could impact trade, and so I think the near-term risk for stocks like EMN is that the absence of satisfactory resolutions is going to limit their upside. The larger risk is that those tensions could force prices even lower and push these stocks into longer-term downward trends. EMN is very close to what I think it is an important signal point that investors can use to plan their strategy in either direction.
Fundamental and Value Profile
Eastman Chemical Company (Eastman) is an advanced materials and specialty additives company. The Company’s segments include Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. In the AFP segment, it manufactures chemicals for products in the coatings, tires, consumables, building and construction, industrial applications, including solar energy markets, animal nutrition, care chemicals, crop protection, and energy markets. In the AM segment, it produces and markets its polymers, films, and plastics with differentiated performance properties for end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support its specialty operating segments. Its product lines in Fibers segment include Acetate Tow, Acetate Yarn and Acetyl Chemical Products. EMN has a current market cap of $142.6 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew almost 22% while sales grew about 13%. Growing earnings faster than sales isn’t easy, and over time isn’t really sustainable, but it is also a positive mark of management’s ability to maximize their business operations.
- Free Cash Flow: EMN has generally healthy free cash flow of $939 million over the last twelve months. This number has improved markedly since June of last year, when free cash flow was a little over $650 million.
Debt to Equity: the company’s debt to equity ratio is 1.12, which is a little high; levels at 1 or below are preferred. However, the company’s balance sheet indicates operating profits are more than adequate to service the debt they have.
Dividend: EMN pays an annual dividend of $2.24 per share, which translates to an annual yield of 2.22% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for EMN is $39.40 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.55. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Chemicals industry is 2.8, and the historical average for EMN is 3.0. That translates to about 15% upside in the stock right now, which would push its price a little above its 52-week highs.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: Since early March, the stock has operating within a range between about $100 on the low side and $110 on the top end. The chart above uses the red diagonal line to trace the stock’s upward trend from August of last year to its peak in March, and then calculate Fibonacci retracement levels. Today’s movement has the stock possibly breaking the first level of Fib support. That’s interesting, but the real signal is at the next level, shown as the 50% retracement level (technically not a Fibonacci number, but still often an important level of emotional price activity) at around $97 per share. That range also coincides with the stock’s long-term trend line as calculated by a 200-day moving average and which is taken by technical traders as an important indicator of the stock’s long-term trend. The stock could use that level as support anywhere between its current price and $97, which would generally confirm the long-term trend. On the other hand, a break below $97 could mark a critical reversal point where the long-term trend shifts from up to down.
- Near-term Keys: Watch the stock’s activity between $100 and $97 per share. A pivot back to the upside, with a push above $101, would certainly suggest the stock should at least push back into the $110 range and could offer a good short-term bullish trade by buying the stock or using call options. A break below $97 would probably not see any kind of pause in downward momentum until about $93 per share, or in more extreme cases, possible as low as the $85 to $86 range. If you don’t mind working with downward price patterns and trends, that could be an opportunity to short the stock or to work with put options.