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Is Eastman Chemical Overvalued or Undervalued Compared to Peers?

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Eastman Chemical’s one-year forward PE multiple

As of June 12, Eastman Chemical (EMN) was trading at a one-year forward PE multiple of 12.3x, while peers Celanese (CE) and Westlake Chemical (WLK) were trading at one-year forward PE multiples of 12.1x and 12.4x, respectively. The forward PE multiple is a valuation method that considers a company’s future earnings estimates. The multiple helps investors compare two or more companies operating in the same industry to assess which companies are undervalued and which are overvalued.

What EMN’s valuations suggest

EMN reported its Q1 adjusted earnings per share of $2.23 as compared to $1.83 in Q1 2017, an impressive increase of 21.8%. EMN has been increasing its product prices and has been able to pass on the cost of increasing raw material prices to its customers. Eastman’s Tritan business has seen good growth with the acquisition of new clients and orders. Also, effective cost management is expected to bring down its selling, general, and administrative expenses as a percentage of sales. All these factors are expected to drive growth. As a result, analysts expect EMN’s adjusted earnings per share for the next four quarters to be at approximately $8.71 per share, an increase of 8.6% over the previous four quarters.

On the other hand, Celanese (CE) and WLK (WLK) are poised to grow their adjusted EPS at 9.3% and 37.9%, respectively. Currently, all three are trading at a similar PE. However, WLK looks undervalued compared to EMN and CE.

Investors can get indirect exposure to EMN by investing in the Invesco DWA Basic Materials Momentum ETF (PYZ), which invests 3.4% of its portfolio in Eastman Chemical. The fund also invests 4.3% of its holdings in FMC (FMC) as of June 12.

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