Eastman Chemical (EMN): Will Weak Prices Dent Q2 Earnings?

Eastman Chemical EMN is scheduled to release its second-quarter 2016 results after the bell on Jul 28.

In the last quarter, the chemical maker delivered an 11.76% positive earnings surprise. The company’s profits surged in the quarter, helped by its cost-management actions and strong growth of its specialty products. But its sales declined in the quarter on lower selling prices and currency headwinds, and missed expectations.

Eastman Chemical has beaten the Zacks Consensus Estimate in all the trailing 4 quarters with an average beat of 6.78%. Let's see how things are shaping up for this announcement.

Factors to Watch For

Eastman Chemical, in its last earnings call, said that it is seeing increased competitive pressure, stemming from a sluggish global economy, depressed oil prices and weakening currencies across Asia and Europe. The company is looking to deliver adjusted earnings per share for 2016 that approach the level achieved in 2015 ($7.28 per share) amid the prevailing business environment.

Eastman Chemical faces pricing pressure across most of its businesses. Soft pricing, in part, due to competitive pressure is affecting the Chemical Intermediates unit. Earnings for this segment are expected to decline in 2016 due to pricing pressure and the low oil pricing environment. Margins in the olefin business are also expected to remain under pressure due to still weak pricing. The depressed oil price environment and continued pressure on olefin spreads are expected to weigh on the company’s earnings in 2016.

Eastman Chemical is also exposed to currency headwinds given a stronger U.S. dollar. Unfavorable currency translation weighed on its top line in the first quarter and is expected to continue to affect results in the June quarter.

Nevertheless, Eastman Chemical should gain from synergies of acquisitions (especially Taminco), capacity additions and cost-cutting actions. The company is making good progress toward its $200 million productivity gains target. Some benefits of its productivity and cost actions are expected in the second quarter.

Earnings Whispers

Our proven model does not conclusively show that Eastman Chemical will beat earnings estimates this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The Earnings ESP for Eastman Chemical is -3.51%. This is because the Most Accurate Estimate stands at $1.65, while the Zacks Consensus Estimate is pegged at $1.71.

Zacks Rank: Eastman Chemical’s Zacks Rank #3 (Hold), when combined with a negative ESP, makes surprise prediction difficult. We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Warranting a Look

Here are some companies in the chemicals space that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Huntsman Corporation HUN has an Earnings ESP of +7.84% and a Zacks Rank #1 (Strong Buy).

FMC Corp. FMC has an Earnings ESP of +4.48% and a Zacks Rank #2 (Buy).

International Flavors & Fragrances Inc. IFF has an Earnings ESP of +0.71% and a Zacks Rank #2.

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