Eastman Chemical — Good Company, Pricey Stock

While Eastman Kodak (NYSE:EK) is fading away, its former chemicals unit, Eastman Chemical (NYSE:EMN), is doing great

In the 1980s, I did consulting work for both companies. At the time, they were all part of the same corporation — but in January 1994, Eastman Chemical, based in Kingsport, Tenn.,�was spun out from its Rochester, N.Y.-based parent, and its stock has had a nice run — up 126% since January 2004.

And it has done particularly well since March 2009. Since that low point, the stock has surged 344% to $102 from $23. By contrast, Kodak�s stock has lost 92% of its value since that spinoff — falling from $46 to $3.58.

Here are two reasons to buy Eastman Chemical stock:

• First-quarter performance was great. Revenue�was up�28% percent to $1.76 billion, and Eastman beat expectations of analysts surveyed by Thomson Reuters I/B/E/S for earnings by 30% and revenue by 15%. And the company raised its 2011 EPS forecast to $9 — 11% above analysts� expectations before its first-quarter report.
• Recent buying by hedge funds. According to SeekingAlpha, five recent buyers of Eastman stock (and the amounts they bought) include First Eagle Investment Management ($59 million), Kingdon Capital Management ($17 million), Zweig-DiMenna Associates ($13 million), SAC Capital Advisors ($8 million) and Balyasny Asset Management ($3.5 million).

Here are two reasons not�to buy Eastman Chemical stock:

• Eastman�stock is not cheap.�Eastman trades at a price-to-earnings-to-growth (PEG) ratio of 2.13 (where 1.0 is considered fairly valued). Eastman�s P/E is�14.9 on earnings expected to climb 7% to $10.01 a share in 2012. Its 2011 earnings growth is expected to be a far better�34%. So if Eastman can continue that growth rate into 2012, its valuation would be reasonable.
• Progress in trying to earn more than its capital cost.�Eastman does not earn enough in operating profit to offset its cost of capital. But it is getting closer. After all, it�s producing positive EVA Momentum, which measures the change in �economic value added� (essentially, profit after deducting capital costs) divided by sales. In 2010, Eastman�s EVA momentum was up 5%, based on 2009 revenue of $4.4 billion, and EVA that improved from negative $382 million in 2009 to negative $162 million in 2010.

While Eastman Chemicals is much more successful than its former parent, it looks expensive to me and would be worth buying should July feature a debt-ceiling-negotiations selloff in the overall market that drives down its stock price to a more reasonable level.

Peter Cohan has no financial interest in the securities mentioned.