Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – February 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Eastman Chemical Company (EMN)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Eastman Chemical Company (Eastman) is a specialty chemicals company that produces a range of advanced materials, chemicals and fibers. The Companyâ€™s segments include Additives & Functional Products, which consists of the rubber additives product lines and the specialty polymers and solvents product lines; Adhesives & Plasticizers, which consists of the adhesives product lines and the plasticizer product lines; Advanced Materials, which consists of plastics Performance Films and Advanced Interlayers product lines; Fibers, which consists of the acetate tow, acetate yarn and acetyl chemical product lines, and Specialty Fluids & Intermediates, which consists of the specialty fluids product lines and oxo and acetyl intermediates product lines. The Advanced Materials segment owns SunTek brand, and has a manufacturing facility and master distribution center in Martinsville, Virginia and nine sales distribution centers to serve the global market.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$72.81|
|Value Based on 0% Growth||$42.68|
|Market Implied Growth Rate||3.26%|
|Net Current Asset Value (NCAV)||-$62.64|
Balance Sheet – DecemberÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Eastman Chemical CompanyÂ is suitableÂ for both the Defensive Investor and the Enterprising Investor. Â The Defensive Investor’s only concern is the low current ratio, while the Enterprising Investor is only concerned with the level of debt relative to the net current assets.Â As a result, all valueÂ investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. Â From a valuation side of things,Â the company appears to be undervaluedÂ after growingÂ its EPSmg (normalized earnings) from $2.07 in 2010 to $5.02Â for 2014. Â This level of demonstrated growth is greater thanÂ the market’s implied estimate of 3.26%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the price.
Be sure to check out previous ModernGraham valuations of Eastman Chemical Company (EMN)Â for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Eastman Chemical Company (EMN)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Eastman Chemical Company (EMN)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.