Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie College of Business

Ryan Wallen [rwallen@uiowa.edu]

Eastman Chemical Company (EMN) March 6th, 2018

Basic Materials – Diversified Chemicals Stock Rating HOLD

Investment Thesis Target Price $95-100 We recommend a HOLD for Eastman Chemical. Global economies have risen at high rates recently. The United States is expected to grow in the near future as well. Many of the markets Eastman conducts business with are operating at high levels. Our target price implies an upside of 13-19% based on DDM and relative multiple models, as well as expected growth in end product segments as GDP rises. Drivers of Thesis

• Markets in which Eastman operates (construction and automobiles) are operating at high levels, and have shown steady growth the past 5 years.

• Eastman has been active in mergers and acquisitions in the past to raise margins by purchasing specialty chemicals companies. We believe this could have a positive impact on margins in the future.

• A rise in overall GDP combined with growth in the overall market would have a positive impact on this company, and we expect both to happen in 2019. We project GDP to rise by 2.8%.

Risks to Thesis

• A slowdown in the global economy would hamper Eastman’s sales going forward. The United States slowing down would do the same.

• Volatility in the commodity markets such as oil and natural gas causes margins to fluctuate.

• A trade war with China would lower Eastman’s sales in China, and pinch margins on products sold in the United States if there is a higher tariff imposed.

Henry Fund DCF $113.35 Henry Fund DDM $103.05 Relative Multiple $104.62 Price Data Current Price $75.88 52wk Range $67.40 – 112.45 Consensus 1yr Target $91.71 Key Statistics Market Cap (B) $10.53 Shares Outstanding (M) 139.80 Institutional Ownership 85.72% Three Year Beta 1.16 Dividend Yield 3.15% Est. 5yr Growth 2.05% Price/Earnings (TTM) 11.08 Price/Earnings (FY1) 11.30 Debt/Equity 1.06 Price/Book (mrq) 1.76 Profitability Operating Margin 14.56% Profit Margin 24.42% Return on Assets (TTM) 6.77% Return on Equity (TTM) 19.10%

Earnings Estimates Year 2016 2017 2018 2019E 2020E 2021E

EPS $5.83 $9.68 $7.68 $7.49 $7.97 $8.40

growth 1.62% 66.05% -20.70% -2.40% 6.35% 5.45%

12 Month Performance Company Description

Eastman Chemical is a diversified chemical producer. They operate in four main segments. Additives, Advanced Materials, Chemical intermediates, and Fibers. The products they produce are used in many different industries. Some of the most popular are transportation, consumables, construction, and industrial chemicals. They were founded in 1920, and are headquartered in Kingsport, Tennessee.

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EXECUTIVE SUMMARY

We recommend a HOLD on Eastman Chemical. A steady economy in the United States, alongside strong global economies should provide steady growth opportunities. In the past Eastman has acquired multiple companies in the specialty chemicals industry to help raise margins. We expect them to maintain these margins in the future, which will put them in position for growth.

Overall, they will be reliant on the economies of the United States, and China. Oil prices will also be important. Volatility in the commodities markets squeezes Eastman’s margins. Weakening economies provide less sales opportunities. They operate in almost all different industries; however, the biggest ones are transportation, consumables, and construction. These markets have grown steadily the past few years, and we expect them to continue. This is where our projections upside is derived from. A trade war with China, or slowing housing markets in the United States would significantly impact Eastman.

COMPANY DESCRIPTION

Eastman Chemical Company is a diversified chemical producer headquartered in Kingsport, Tennessee. Eastman was founded in 1920 because the creator, George Eastman noticed a scarcity in raw materials following the first world war. The building blocks of the company at that point in time were calcium acetate, sodium acetate, and acetic anhydride. Eastman expanded operations during the second world war to help with the efforts.

Today they operate 48 sites worldwide, and have four main product segments. Additives and Functional Products, Advanced Materials, Chemical Intermediates, and Fibers. The products they create are diverse, and are used in many different end markets and products. The largest end uses include transportation markets, consumables, and building and construction. Below is a chart of the end use of all products they produce.

This graphic makes it easy to see just how diverse they are. This is good from a standpoint that no one thing is going to significantly drop their value, but makes it difficult to forecast going forward since so many markets are involved. When forecasting sales, we looked at end use market, product segment, and end use location.

Sales growth the past 5 years has been relatively slow. With a CAGR of 1.6% from 2014-2018. However, the past two years have shown increased growth. From 2016 to 2017 they increased revenue at 6.01% and 2017 to 2018 at 6.30%. Below is a chart of their sales since 2013. Sales were on an upward trend until 2016. Since they have responded with increased growth.

In 2019 they have stated that they expect growth in high-margin products, and are implementing cost management techniques. They also expect to repurchase more shares, and increase EPS. The past 5 years they have repurchased on average 1.5% of shares a year.

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Source: FactSet

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Additives & Functional Products

This segment manufactures many products. End market users are transportation, consumables, building and construction, animal nutrition, crop protection, and home care. This is Eastman’s biggest section, making up 36% of total sales in 2018.

This line grows at a faster rate than the industrial production average due to innovation and sales to various end markets. We project a future growth rate of 2.6%. In 2018 the operating margin was 19.3% Many of the products have unique performance characteristics. They leverage a strong customer base with recurring business to create sales. A large component to the success is its formulation collaboration with customers16.

Advanced Materials

The advanced materials segment is more of a consolidated line. The main products are polymers, films, and plastics. These are used in transportation, consumables, durable goods, and health and wellness markets. In 2018 the line made up 27% of Eastman’s sales, and had an operating margin of 18.7%. We project growth of 2%.

Eastman’s advantages in this area include application development and market development capabilities that enable the segment to modify polymers and films and customize their final properties. One such example is their Tritan copolyester that is used in food contact setting since they are produced without Bisphenol “BPA”. BPA is a chemical used in a lot of plastics that some people have recently started worrying about having health effects, as it may be able to absorb into food. Instances like this include water bottles, Tupperware, and plastic bags17.

Another product that makes up a large number of sales in this area is the Saflex Q Series. They believe they have a leading technology position in the window film market by using high performance sputter coatings. These enhance solar heat rejection, while maintaining superior optical properties16.

Eastman believes that they have competitive advantages in customer relationships, vertical integration, and leading market positions.

Chemical Intermediates

The chemical intermediates segment uses large scale vertical integration from cellulose, acetyl, olefins, and alkylamines to support the specialty segments that have advanced cost positions. They do this by selling excess intermediates that they do not need for their own production. Many of the end sale users are industrial chemical processors, construction, and agrochemicals. In 2018 28% of total revenue came from chemical intermediates. The operating margin was 9.3% in 2018. We project 1.5% growth in the long run.

The line has competitive cost positions because they have access to lower cost raw materials due to the company’s scale. Some of the products they sell are coal, ammonia, and methanol. They expect the line to continue growing due to use of non-phthalate in the U.S., Canada, and Europe. Phthalate’s are a group of chemicals used to make plastics more flexible and harder to break. Products that use them vary from vinyl flooring, to pieces for automobiles, to raincoats. Recently studies are being done to see what kind of effects these chemicals can have on the body, but they are banned from some children’s toys18.

One thing to watch going forward is the cyclicality of the segment. In the past this segment has been susceptible to periods of supply and demand imbalance. In their annual report, Eastman discusses steps to reduce the troughs of these cycles. However, they do expect results to fluctuate.

Fibers

The fibers product line has two main end use markets. Cigarette filters, and acetate yarns. They are the world’s largest producer of acetate yarn, and it has been a part of the business for over 85 years. In 2018 the segment contributed 9% of total revenue. The operating margin was 21%. We project -1% growth going forward.

The 10 largest customers of this specific segment make up 70% of their sales. These customers include cigarette producers and fabric manufacturers. Part of their competitive advantage is that they have many repeat sales with their long-term customers.

Despite high barriers to entry which include high capital costs, the segment has been on a significant decline the past 5 years. We believe this has to do with the global trend of cigarette sales diminishing. Management has

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said that they expect to continue strong cash flows from this segment, however.

RECENT DEVELOPMENTS

Transportation Markets

As discussed previously, Transportation markets are one of the largest end use consumers of Eastman’s products. In 2017 they accounted for 20%. The products that Eastman produces that are used include foaming for the seats, parts for electronics, and plastics for the bumpers. On average each new car created has around $3,250 in costs attributed to the chemicals industry1.

As the chart above shows, domestic auto production has been on a decreasing trend since 2013. The CAGR decline over this span is 9.28%. We think part of this is due to decreased sales country wide. February sales were down year over year by 1.25% in terms of cars and trucks sold in the united states. That is not enough to significantly impact Eastman, but if interest rates continue to rise, we think that car sales could decline even more. Movement towards ride sharing could also be a cause for fewer cars.

However, this trend of decreased production has not been seen worldwide, which is important because 56% of their sales are outside of the United States. Above is a chart of worldwide automobile production since 2013.

Sales globablly have grown at a CAGR of 2.93%. That is close to what GDP has risen by in the past, and should be capable of keeping Eastman’s transportation sales steady.

Construction Markets

Construction made up 14% of the sales of Eastman in 2017. Dating back to 2013, it has never made up less than 14%, or more than 16%. It has been a stable piece to Eastman’s diverse mix of end consumers.

Since 2013, construction spending has risen at a CAGR of 6.38%3. This is outpacing the overall GDP, and is a positive for Eastman. However, towards the end of 2018 spending began to decline a small amount. From October 2017 to October 2018, construction employment increased by 4.9%, and at the end of September there were 278,000 open construction jobs. This is most likely a sign that while construction companies are busy, they are having a harder time finding employees which could diminish the amount of projects they can complete.

The producer price index for the construction industry has seen prices rise in the past few years. Since 2017 the CAGR of materials and components for construction have increased at 4.08%4. One of the price drivers has been tariffs on steel and aluminum. If tariffs were to be rise on these, it could lead to less construction projects, which in turn would hurt the chemicals industry.

Housing Markets

Housing is a section of construction, but is broken out individually and can be a good indicator of sales opportunities for Eastman, and other chemical companies. On average, each new house constructed contributes $15,000 to the chemicals industry via raw materials and

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other inputs in building1. Below is a graph of housing starts.

In January 2018, housing starts were at a 10-year high. However, in November they were down 3.6% year over year. There are a few things that could cause a decline. Housing is cyclical, and interest rates have been on the rise. As the rates rise people will be less inclined to buy a house as payments will be higher5. At their current level we think there is opportunity for growth.

INDUSTRY TRENDS

Mergers & Acquisitions:

Mergers & Acquisitions have been a part of Eastman Chemical for many years. Going back to 2013 they have acquired 8 companies, and sold off 4. Of the 8 they have bought, 3 have been specialty chemicals companies. 1 was a diversified chemicals company, and the others were industrial machinery, wholesale distributers, packaging, and industrial specialties6.

Taminco Corp.

In September 2014 it was announced that Eastman had acquired Taminco Corp, for 2,707M. Taminco had three business lines. Functional Amines, Specialty Amines, and Crop Protection. These were mainly sold to agriculture, water treatment, animal nutrition, and energy markets. This deal added alkylamines to Eastman’s business mix7.

Commonwealth Laminating

In December 2014 they closed a deal to acquire Commonwealth Laminating & Coating Inc for 438M. This

was a move to expand their films offerings and to increase their customer base.

Both were ways for Eastman to expand its offerings into specialty chemicals companies that would help to raise margins. They have not actively acquired another company since 2016, however we think it’s an option that they can utilize to increase sales if they slow down8.

Industry M&A

Since 2013 there has been 3,671 mergers and acquisitions inside the chemicals sector. In the chart below you can see which sub industry these acquisitions have been in.

It is clear that commodity chemicals and specialty chemicals make up a vast majority of them. Acquisitions dropped from 2017 to 2018 in commodity chemicals and specialty chemicals. Part of the reasoning is that oil prices were higher in the first 3 quarters of 2018.

The 2019 outlook for mergers is murky. China’s economy grew at its slowest rate in 30 years in 2018. Meanwhile, the United States economy is thought by some to be slowing down, or at the end of an expansion cycle.

MARKETS AND COMPETITION

International Markets

From 2013 to 2017 Eastman Chemical has maintained a diverse geographic sales profile. On average, over 55% of their sales are exported outside of North America. A chart of their 2018 sales is below. They are in line with the previous 5 years.

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The two main regions outside of North America are Asia and Europe. Latin America makes up a small portion, however it’s never eclipsed more than 5.8% of their total revenue. We will use Asia and Europe to analyze their sales going forward.

The GDP’s of countries in the “Asia Pacific” region are top heavy. China, Japan, and India are the three that dominate. Below are the GDP’s in billions of Asia.

China is clearly the largest, and is one of the largest buyers of Eastman’s products. Since 2013 China’s GDP has grown at a CAGR of 6.45% a year, however it has been slowing of late. We see this as a region of growth in the future for Eastman, as China has grown at a faster rate than the United States. There are more emerging countries in this region that could increase sales. India is one of them, with a GDP rising at 8.45% since 2013. These countries manufacture many products that require an input that Eastman Chemical produces.

Europe is the other main market besides North America and Asia. Over the past five years Eastman has averaged just over 24% of their sales to this area. Germany, The United Kingdom, and France are the three largest countries by GDP in Europe. All three have had decreasing GDP’s over the last five years. Some of this is due to the increasing markets in Asia. Despite this, Eastman’s sales to the region have increased from 21% of their sales in 2013, to just over 27% in 2017. We project that it will remain a steady region of sales going forward for the company.

North America is the biggest buyer of their products. Since 2013 the average percent of sales attributed to North America is 45.4%. The GDP of the U.S. has risen at a CAGR of 3.82%. This played a large part into our forecasted sales, as the products provided are so diverse, it is our belief that GDP is a good indicator of sales moving forwards. Other companies in this industry also export many of their sales.

Peer Comparison

Eastman Chemical competes in the major diversified chemical space. This is a somewhat challenging industry to find peers in, as they sell many products across many different markets. As such, they do not compete head to head with any one firm in every aspect of their business. However, there are companies that have similar structures as them. The three that we think fit this mold are Celanese Corporation (CE), Westlake Chemical (WLK), and Huntsman Corporation (HUN). All are in the United States, as there are other comparable companies globally, but we felt that there are competitive advantages to being in specific regions.

Celanese Corporation

Celanese Corporation is less diversified than Eastman, but still operates in multitude of sectors. They classify themselves as a “global technology and specialty materials company”. Their products include polymers that are used in high value applications, to go alongside their acetyl and intermediate chemicals11. They sell these to most of the major industries. Some that are of note are automotive, chemical additives, construction, filtration, and paints. Many of these are areas in which Eastman also competes.

In 2018 Celanese grew sales by 17%. Their stock dropped 14.6%, in line with the market, and industry. They missed Q4 earnings by $.04 a share.

Source: Statista

Source: EMN 10-K

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Westlake Chemical Company

Westlake is a more diversified company similar to Eastman. They have products including vinyl’s, polymers, and building supplies. They are used in many different industries. A few of the main ones being rigid packaging, automotive, water treatment, and residential construction12.

In 2018 they increased sales by 7.4%, and increased their operating margin from 15.69% to 16.69%. However, their stock decreased by over 39% throughout the year. They also missed on Q4 earnings by a substantial amount. They had EPS of .95, while estimates were around $1.67. They cited lower sales prices for all major products. They missed on revenue as they had 2B vs estimates of 2.09B. This is in line with what we’d expect with lowering oil prices.

Huntsman Corporation

Huntsman Corporation is centered around four main product segments. Polyurethanes, performance products, advanced materials, and textile effects. Some of the end markets they service are automotive production, composite wood, insulation, and agro-chemicals. Eastman also competes in the automotive and agro-chemicals markets13.

Huntsman saw sales rise 12% in 2018, nonetheless their stock priced dropped 42%. These companies are all heavily reliant on what the market does. In Q4 the beat revenue projections, but missed on EPS slightly. They cited the same issues as Westlake, pertaining to falling prices.

Financial Analysis

MKT CAP

BETA REV Gross Margin

OP Marg

EMN 11,171 1.16 10,151 24.24% 14.83%

CE 12,151 1.01 7,155 27.21% 18.57%

HUN 5,767 1.37 9,379 21.59% 11.12%

WLK 9,277 1.18 8,635 21.84% 16.69%

ROA ROE P/E (2019E) Dividend Yield

EMN 6.6% 19.28% 10.9 3.15%

CE 12.86% 41.29% 9.9 2.31%

HUN 5.91% 20.93% 8.7 3.37%

WLK 8.37% 18.94% 10.7 1.39%

Eastman and Celanese are the two largest companies in the space with market caps of 11+ and 12+ billion. Each company has a beta over 1, which indicates that they are reliant on the market. Huntsman has the second highest revenue in 2018, however they have the lowest market cap by over 3 billion.

From a profitability standpoint CE leads the way with an operating margin of 18.57%, and a gross margin of 27.21%. We believe this is due to their company being based more on specialty chemicals for more specified needs, rather than the diverse sectors of the others.

In the more diversified field, we believe Eastman and Westlake are the two best situated financially. Westlake has grown at a CAGR of 18.09% since 2013, compared to Eastman’s 1.64%. They also have a higher operating margin. However, they pay out a substantially smaller dividend. They also had disappointing Q4 earnings, as margins dropped in Q4.

ECONOMIC OUTLOOK

Oil

Eastman has an interesting relationship with the oil prices. Oil is one of the main inputs into many products that they produce. When oil prices rise, they can offset this by raising prices. When oil prices decline, they must lower prices in line with competition. The biggest issue is volatility in the markets. Recently in Q4 of 2018 oil prices fell. This means that Eastman’s prices fell as well. The problem is that they had already bought the oil at a higher price, and were not selling it at a price conducive to what they had purchased it at14. Below is a graph of oil prices since March 2017.

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There’s a noticeable drop in prices from October 2018 to December 2018. This is the beginning of the fourth quarter for Eastman. Below is Eastman’s operating margin over the same time period. The only time in the past 2 years that their operating margin in a quarter dropped below 16% is when oil prices dropped significantly. This is in line with what we expect when sharp decreases happen. Going forward a steady oil price would be advantageous for Eastman.

Looking at the futures curve for Crude Oil, it seems that a price in-between $60-$65 is the consensus for the next few years. This would help Eastman stabilize their margins. We believe that oil will be it will be around $61 a barrel in 2 years. Natural gas has a similar relationship with the industry.

China

Many of the specialty plastics that Eastman produces are made in China. Most of which are used in consumer durables markets. Since they are produced in China and sold in the United States, they would be subject to an increased tariff between the U.S. and China, which has been discussed.

In China Eastman mainly sells their high value specialties. A slowdown in the Chinese GDP would affect that market which is considered high margin14.

Going forward this is one of main things to watch that could have a direct impact on Eastman’s sales. Lower tariffs would be beneficial to the company. It would also help if the talks concluded sooner than rather, as the tensions around a trade war are causing Chinese

consumers to destock and purchase only on an at need basis.

Chemical Industry Growth

The U.S. chemical industry is expected to grow at 3.6% in 2019, up from 3.1% in 2018. There has been high demand in chemicals for manufacturing, while consumer spending is also helping drive this. Manufacturers are also planning on increasing capital expenditures by 6%, which creates opportunities for the industry through sales of materials15.

Below is a graph of employment in the chemical industry with projections from the American Chemistry Council for the next 5 years. While it is a small upward trend, it had been declining in the past. More employment would lead to more opportunity for companies to increase sales.

CATALYSTS FOR GROWTH

• Eastman will follow the trend of the economy. We think believe that the economy will continue growing, as will Eastman.

• While they are currently very well diversified in many different markets, potential mergers and acquisitions could open the door for higher margins in the future for Eastman.

INVESTMENT POSITIVES

• GDP Growth is expected to maintain at moderate levels, which will help Eastman’s sales as they are levered to the market.

• Markets in which Eastman operates the most have grown at faster rates than the GDP in the past, and we think they will maintain this.

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• Eastman is well positioned in their margins for steady growth moving forwards.

INVESTMENT NEGATIVES

• Slowing GDP growth in china, alongside slower than expected growth in the United States could lead to less sales. Interest rates will play a factor in this as well.

• An unsteady oil market could cause tightening margins for Eastman, making their cash flows smaller.

VALUATION

Revenue Growth:

Revenue for Eastman is split into their product segments. We found this to be the best way to forecast, as the segments are broad, but give a basic understanding of what they include.

Additives and Functional Products has been the largest product segment since 2013. It includes chemicals used in transportation, building and construction, and crop protection. Since 2013 it has grown at a CAGR of 7.48%. In our forecast we used a 6% increase in 2019, and 4% thereafter. Recently the line has had more volatile growth, with rates from 20% in 2015 to -6% in 2016. We found it challenging to project numbers in that way, and decided on a number that outpaces GDP. We think it is a moderate estimate considering the past few years. Below is a chart including 5 years of historical numbers and forecasts.

Advanced Materials includes products such as polymers, films, and plastics. They are used in a variety of end markets, including transportation, consumables, and construction. Since 2013 the line has been stagnant, with

a CAGR of 2.27%. Recently it has seen increases of 5% in 2017 and 7.1% in 2018. We have it set for 5% growth in 2019, and then declining closer to the rate from the past 5 years. The terminal growth rate is 2.4%. This is another modest projection, but we do not see anything that will significantly spike sales. Below is a chart including 5 years of historical numbers and forecasts.

Chemical Intermediates is more orientated with specialty segments. This line sells excess intermediates that are unneeded within Eastman, to other chemical companies, and construction markets, among others. This is not a line that has seen growth in the past 5 years, with a CAGR of -.38%. In their annual report they mention that they benefit from cost advantages due to lower cost raw materials. They also expect the use of these products to increase the U.S., Canada, and Europe. With that in mind we set the 2019 growth rate at 3.5%, as it grew 3.8% in 2018 and 8% in 2017. My terminal rate is 1.5%, as this is not area that we believe has room for huge growth. Below is a chart including 5 years of historical numbers and forecasts.

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Source: FactSet

Source: FactSet

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Fibers is a segment that has been on a decline. They sell materials that are mainly used in cigarette filters and yarn. Eastman is one of the world’s largest producers in this area. Since 2013, their revenues have decreased by a CAGR of 8.62%. Cigarette consumption has been on a decline for a few decades now, which directly hurts this line. With that in mind I have set the terminal growth rate to -8%, in line with the past 5 years. This does not have a large overall impact on the total revenue, as this line was only 9% of total revenue in 2018.

COGS:

Our Forecast for cost of goods sold is 69.7%. The past five years have seen an average rate of 68.9%. However, since 2015 it has gone from 67.34% to 69.62% in 2018. I think that it will remain under 70% going forward, as they have discussed aggressive cost management strategies in their annual report. If It was to rise above 70%, it would have a significant effect on margins, and thus stock value.

WACC:

To obtain the weighted average cost of capital we used the CAPM model to determine the cost of equity. This resulted in 8.46%. This was determined by using a 4.95% equity risk premium, which was what we decided to use as a class, the beta used was 1.16, which is their 3-year weekly beta. The 10-year treasury has a rate of 2.72%. The cost of pretax debt was 4.53%, which was the yield on a bond they have outstanding that matures in 2027. The tax rate going forward is 18%, which is the guidance they gave in their Q4 results in 2018, and reflects 2018 tax law changes.

DCF Model:

Using the inputs listed previously, our DCF price was $109.75. This is quite a bit higher than the 1-year target estimate of $91.71. We feel that our forecasts are moderate in terms of revenue growth, and possibly on the high side in COGS. However, with the economy slowing down we believe that markets are less optimistic. Before last fall’s drops, the price had traded as high as $109. For it to obtain that price again we believe there would need to be large growth in the economy. Thus, my other models are what my target price is based off.

Dividend Discount Model:

The DDM produces a price of $103.05 which is significantly lower than the DCF. This is closer to what other analysts have as well. My dividend estimates are close to the group consensus. Our prediction in 2021 is $2.68 a share, while 2.71 is what others have. This is an upside of nearly 20%. It last traded at this price in September of 2018.

Relative P/E:

Our P/E Model derives a price of $104.62. To determine this, I used companies that resemble Eastman. These include Huntsman Corp. and Westlake Chemical, whom are both diversified chemical producers. Celanese Corporation, whom is more specialty chemicals, and then PolyOne Corp, Valvoline Inc, and FMC Corp. The previous 3 all have higher P/E ratios than EMN, and they operate it different ways. Most are less diversified than EMN and are more segmented into specialty chemicals, which have higher margins. However, we selected them as they all have a product that competes in the same market as Eastman.

KEYS TO MONITOR

The most important thing for Eastman going forward is keeping its margins up. If COGS were to rise as much as 1% going forwards, it would have a large effect on the bottom line. They need to combat this by divesting more into products that have higher margins, and taking action in cost management. If they don’t do this their margins will shrink, and they will be an unfavorable company to own.

-

500

1,000

1,500

2,000

Fibers

Source: FactSet

Source: FactSet

Page 11

REFERENCES

Charts 1. Eastman Chemical Company 10-K 2. FactSet – Eastman Chemical Income

Statement 3. FRED Domestic Auto Production 4. Statista Global Auto Production 5. FRED Housing Starts 6. Deloitte Chemicals Mergers and Acquisition

Report 7. Statista – GDP’s of Asia 8. FactSet- Ratio Analysis- Eastman Chemical 9. U.S. Energy Information Administration –

Petroleum & Other Liquids – Spot Prices 10. American Chemical Council – U.S. Chemical

Industry Continues to Outpace Industrial Output

In Text Citations

1. C&EN – US Chemical output set to rise in 2019

2. AutoBlog – U.S. vehicle sales in February fell, and demand was even weak for SUVs

3. FRED – Constructing Spending 4. FRED- PPI – Construction 5. Electrical Market Data – Total Housing

Starts Slide 6. FactSet – EMN – M&A Activitey 7. Eastman Chemical – Eastman Completes

Acquisition of Taminco 8. Eastman Chemical – Eastman Completes

Acquisition of Commonwealth Laminating 9. Deloitte – 2019 Global Chemical Industry

Mergers and Acquisitions outlook 10. Statista GDP 11. CE 2017 Annual Report 12. Westlake Chemical Annual Report 13. Huntsman Corporation Annual Report 14. SeekingAlpha – EMN is cheap: Why

Haven’t I bought more? 15. American Chemistry Council – U.S.

Chemical Industry continues to outpace Industrial Output

16. Eastman Chemical 2017 Annual Report 17. Mayo Clinic – What is BPA, and what are

the concerns about BPA? 18. Webmd – Phthalates: Are they safe?

IMPORTANT DISCLAIMER

Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

Eastman Chemical CompanyRevenue Decomposition

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024ESales by Product Segment

Addiditives and Functional Products 2,979 3,343 3,647 3,866 4,059 4,221 4,390 4,568 4,687 -6% 12% 9.1% 6.0% 5.0% 4.0% 4.0% 4.1% 2.6%

Advanced Materials 2,457 2,572 2,755 2,893 3,008 3,091 3,170 3,245 3,309 2% 5% 7.1% 5.0% 4.0% 2.8% 2.6% 2.4% 2.0%

Chemicals Intermediates 2,534 2,728 2,831 2,930 3,018 3,063 3,109 3,156 3,203 -10% 8% 3.8% 3.5% 3.0% 1.5% 1.5% 1.5% 1.5%

Fibers Segment 992 852 918 950 912 857 793 730 722 -19% -14% 7.7% 3.5% -4.0% -6.0% -7.5% -8.0% -1.0%

Total Sales 9,008 9,549 10,151 10,639 10,998 11,233 11,463 11,698 11,922 -6.63% 6.01% 6.30% 4.81% 3.37% 2.14% 2.04% 2.05% 1.91%

Sales by Customer Region United States and Canada 4,025 4,189 4,365 4,575 4,729 4,830 4,929 5,030 5,126 Asia Pacific 2,163 2,306 2,436 2,553 2,639 2,696 2,751 2,808 2,861 Europe, Middle East, Africa 2,305 2,539 2,741 2,872 2,969 3,033 3,095 3,158 3,219 Latin America 515 515 609.06 638.33 659.86 674.00 687.76 701.89 715.31 Total Sales 9,008 9,549 10,151 10,639 10,998 11,233 11,463 11,698 11,922

Eastman Chemical CompanyIncome Statement

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Sales 9,008 9,549 10,151 10,639 10,998 11,233 11,463 11,698 11,922 Depreciation & Amortization 580 587 604 628 660 674 688 702 715 Cost of sales 6,078 6,508 7,068 7,234 7,533 7,717 7,898 8,072 8,226 Gross profit 2,350 2,454 2,479 2,777 2,804 2,842 2,877 2,925 2,980

Selling, general and administrative expenses 703 699 721 766 781 798 814 831 847 Research and development expenses 219 215 235 255 264 270 275 281 286 Asset impairments and restructuring charges, net 45 8 45 32 33 34 34 35 36 Operating earnings 1,383 1,532 1,478 1,723 1,726 1,741 1,753 1,778 1,812

Net interest expense 255 241 235 257 255 254 258 257 257 Early debt extinguishment and other related costs 85 - 7 - - - - - -

Other (income) charges, net 6 (2) 74 - - - - - - Earnings Before Income Taxes 1,049 1,289 1,310 1,467 1,472 1,487 1,496 1,520 1,554

(Benefit from) provision for income taxes 190 (99) 226 255 264 270 275 281 286 Net Earnings attributable to Eastman 5 4

Net earnings 854 1,384 1,084 1,211 1,208 1,217 1,220 1,240 1,268

Basic earnings per share attributable to Eastman 5.83 9.68 7.68 8.67 8.73 9.03 9.30 9.69 10.18

Cash Dividends Per Share 1.90 2.12 2.27 2.48 2.58 2.68 2.78 2.88 2.98 Shares Outstanding Basic (Millions) 146.49 142.97 141.20 139.79 138.39 134.79 131.29 127.87 124.55

Eastman Chemical CompanyBalance Sheet

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024EAssetsCash & Short-Term Investments 181 191 437 747 970 1183 1366 1609 1752Short-Term Receivables 1,211 1,386 1483 1557 1635 1717 1803 1893 2082Inventories 1,404 1,509 1583 1660 1716 1752 1788 1825 1860Other Current Assets 70 57 73 74 77 79 80 82 83Total Current Assets 2,866 3,143 3,576 4,039 4,398 4,731 5,037 5,408 5,778

Net Property, Plant & Equipment 5,276 5,607 5600 5880 6174 6483 6807 7147 7505Total Investments and Advances 107 95 0 0 0 0 0 0 0Goodwill 4,461 4,527 4,467 4,498 4,498 4,498 4,498 4,498 4,499 Intangible Assets 2,469 2,373 2,185 2,119 2,056 1,994 1,934 1,876 1,820 Deferred Tax Assets - - - - - - - - - Other Assets 278 254 378 307 318 325 331 338 345Total Assets 15,457 15,999 16,206 16,844 17,443 18,030 18,607 19,268 19,946

Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 283 393 243 397 394 393 399 398 398Accounts Payable 704 842 1608 867 896 916 934 953 972Income Tax Payable 162 169 183 191 191 204 196 204 215Other Current Liabilities 646 578 0 798 825 842 860 877 894Total Current Liabilities 1,795 1,982 2,034 2,253 2,306 2,355 2,389 2,432 2,478

Long-Term Debt 6,311 6,147 5,925 5,666 5,624 5,608 5,694 5,680 5,681 Provision for Risks & Charges 1,309 1,242 925 968.1 1000.8 1022.2 1043.1 1064.5 1084.9Deferred Tax Liabilities 1,206 893 884 957 990 1011 1032 1053 1073Other Liabilities 228 255 532 553.2 571.9 584.1 596.1 608.3 619.9 Total Liabilities 10,849 10,519 10,300 10,398 10,493 10,581 10,754 10,838 10,937

Stock Holders Equity1,917 1,985 2,048 2,109 2,173 2,238 2,305 2,374 2,445

Retained Earnings 5,721 6,802 7,565 8,430 9,281 10,137 10,992 11,864 12,761 Accumulated other Comprehensive Loss (281) (209) (245) (209) (209) (209) (209) (209) (208) Total Stockholders Equity before Treasury Stock 7,357 8,578 9,368 10,331 11,244 12,166 13,088 14,029 14,998 Less Treasury Stock 2,825 3,175 3575 3962 4371 4793 5311 5676 6066

Total Eastman Stockholders Equity 4,532 5,403 5,793 6,369 6,873 7,373 7,777 8,353 8,932

Noncontrolling Interst 76 77 75 77 77 77 77 77 78 Total Equity 4,608 5,480 5,868 6,446 6,950 7,450 7,854 8,430 9,010 Total Liabilites and Equity 15,457 15,999 16,168 16,844 17,443 18,030 18,607 19,268 19,948

Eastman Chemical CompanyCash Flow Statement

Fiscal Years Ending Dec. 31 2018 2019E 2020E 2021E 2022E 2023E 2024E

Operating ActivitiesNet Income 1084 1211 1208 1217 1220 1240 1268Gross AR -97 -74 -78 -82 -86 -90 -189Inventories -74 -77 -56 -37 -36 -37 -35Other Current Assets -16 -1 -3 -2 -2 -2 -2Non Current Other Assets -124 71 -10 -7 -7 -7 -6Accounts payable 766 -741 29 19 19 19 18Income taxes payable 14 9 0 13 -8 8 11Defered Income Tax -9 73 32 21 21 21 20Other Current Liabilities -578 798 27 18 17 18 17Other Long term Liabilities 277 21 19 12 12 12 12Net Cash Provided by operating activities 1243 1290 1168 1174 1151 1182 1114

Investing ActivitiesPPE 7 -280 -294 -309 -324 -340 -357Investments and advances 95 0 0 0 0 0 0Goodwill 60 -31 0 0 0 0 -1Intangible Assets 188 66 64 62 60 58 56Provisions and reserves -317 43 33 21 21 21 20Other FundsNet Investing Cash Flow 33 -202 -198 -226 -243 -261 -282

Financing ActivitiesShort Term Debt -150 154 -3 -1 6 -1 0Long Term Debt -222 -259 -42 -16 86 -14 1Dividends -321 -347 -357 -361 -365 -368 -371Common Stock + Additional Paid 63 61 63 65 67 69 71Treasury Stock -400 -387 -409 -421 -519 -365 -390

-1030 -778 -748 -735 -724 -679 -688

Net Change in Cash 246 310 223 213 183 243 144

Cash at the Beginning of the Year 191 437 747 970 1183 1366 1609Cash at the end of the year 437 747 970 1183 1366 1609 1752

Eastman Chemical CompanyCommon Size Income Statement

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Depreciation 6.44% 6.15% 5.95% 5.90% 6.00% 6.00% 6.00% 6.00% 6.00%Cost of sales 67.47% 68.15% 69.63% 68.00% 68.50% 68.70% 68.90% 69.00% 69.00%Gross profit 26.09% 25.70% 24.42% 26.10% 25.50% 25.30% 25.10% 25.00% 25.00%Selling, general and administrative expenses 7.80% 7.32% 7.10% 7.20% 7.10% 7.10% 7.10% 7.10% 7.10%Research and development expenses 2.43% 2.25% 2.32% 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%Asset impairments and restructuring charges, net 0.50% 0.08% 0.44% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30%Operating earnings 15.35% 16.04% 14.56% 16.20% 15.70% 15.50% 15.30% 15.20% 15.20%Net interest expense 2.83% 2.52% 2.32% 2.41% 2.32% 2.26% 2.25% 2.20% 2.16%Early debt extinguishment and other related costs 0.94% 0.00% 0.07% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other (income) charges, net 0.07% -0.02% 0.73% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Earnings before income taxes 11.65% 13.50% 12.91% 13.79% 13.38% 13.24% 13.05% 13.00% 13.04%(Benefit from) provision for income taxes 2.11% -1.04% 2.23% 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%Net earnings 9.48% 14.49% 10.68% 11.39% 10.98% 10.84% 10.65% 10.60% 10.64%

Eastman Chemical CompanyCommon Size Balance Sheet

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024EAssetsCash & Short-Term Investments 2.01% 2.00% 4.31% 7.03% 8.82% 10.53% 11.92% 13.75% 14.70%Short-Term Receivables 13.44% 14.51% 14.61% 14.64% 14.87% 15.28% 15.73% 16.18% 17.46%Inventories 15.59% 15.80% 15.59% 15.60% 15.60% 15.60% 15.60% 15.60% 15.60%Other Current Assets 0.78% 0.60% 0.72% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%Total Current Assets 31.82% 32.91% 35.23% 37.96% 39.99% 42.12% 43.94% 46.23% 48.46%

Net Property, Plant & Equipment 58.57% 58.72% 55.17% 55.27% 56.14% 57.71% 59.38% 61.10% 62.95%Total Investments and Advances 1.19% 0.99% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Goodwill 49.52% 47.41% 44.01% 42.28% 40.90% 40.04% 39.24% 38.45% 37.74%Intangible Assets 27.41% 24.85% 21.52% 19.92% 18.69% 17.75% 16.88% 16.04% 15.27%Deferred Tax Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Assets 3.09% 2.66% 3.72% 2.89% 2.89% 2.89% 2.89% 2.89% 2.89%Total Assets 171.59% 167.55% 159.65% 158.32% 158.61% 160.51% 162.33% 164.71% 167.30%

Liabilities & Shareholders' Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%ST Debt & Curr. Portion LT Debt 3.14% 4.12% 2.39% 3.73% 3.58% 3.49% 3.48% 3.40% 3.34%Accounts Payable 7.82% 8.82% 15.84% 8.15% 8.15% 8.15% 8.15% 8.15% 8.15%Income Tax Payable 1.80% 1.77% 1.80% 1.80% 1.74% 1.82% 1.71% 1.74% 1.80%Other Current Liabilities 7.17% 6.05% 0.00% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%Total Current Liabilities 19.93% 20.76% 20.03% 21.18% 20.97% 20.96% 20.84% 20.79% 20.79%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Long-Term Debt 70.06% 64.37% 58.37% 53.26% 51.14% 49.92% 49.68% 48.56% 47.66%Provision for Risks & Charges 14.53% 13.01% 9.11% 9.10% 9.10% 9.10% 9.10% 9.10% 9.10%Deferred Tax Liabilities 13.39% 9.35% 8.71% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%Other Liabilities 2.53% 2.67% 5.24% 5.20% 5.20% 5.20% 5.20% 5.20% 5.20%Total Liabilities 120.44% 110.16% 101.47% 97.74% 95.41% 94.19% 93.82% 92.65% 91.74%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Shareholders' Equity

Total Equity 63.51% 71.23% 74.53% 79.24% 84.39% 90.24% 95.90% 101.41% 107.04%Total Liabilities & Shareholders' Equity -3.12% -2.19% -2.41% -1.96% -1.90% -1.86% -1.82% -1.79% -1.74%

Eastman Chemical CompanyCash Flow Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015 2016 2017

Operating ActivitiesNet Income / Starting Line 444 1,172 757 854 859 1,388 Depreciation, Depletion & Amortization 360 433 450 571 580 587 Deferred Taxes & Investment Tax Credit 48 331 99 107 177 (394) Other Funds 222 (355) 351 222 174 (23) Funds from Operations 1,074 1,581 1,657 1,754 1,790 1,558 Changes in Working Capital 54 (284) (249) (142) (405) 99 Net Operating Cash Flow 1,128 1,297 1,408 1,612 1,385 1,657

Investing ActivitiesCapital Expenditures (470) (488) (596) (652) (626) (649) Net Assets from Acquisitions - - - (45) (26) (4) Sale of Fixed Assets & Businesses 7 31 13 4 41 14 Purchase/Sale of Investments (2,469) - (3,509) - - - Other Funds (30) - 1 - (44) (4) Net Investing Cash Flow (2,962) (457) (4,091) (693) (655) (643)

Financing ActivitiesCash Dividends Paid (192) (140) (210) (238) (272) (296) Change in Capital Stock 56 (179) (367) (83) (130) (334) Issuance/Reduction of Debt, Net 1,644 (530) 3,250 (505) (428) (369) Other Funds (4) (10) (9) (6) (8) (7) Net Financing Cash Flow 1,504 (859) 2,664 (832) (838) (1,006) Change in Cash (328) (12) (23) 79 (112) 10 Cash Beginning of Year 577 249 237 214 293 181 Cash End of Year 249 237 214 293 181 191

Eastman Chemical CompanyValue Driver Estimation

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024ENOPLAT Computation

NOPLAT CALCULATIONNet Sales 9,008 9,549 10,151 10,639 10,998 11,233 11,463 11,698 11,922 Cost of Products Sold 6,078 6,508 7,068 7,234 7,533 7,717 7,898 8,072 8,226 Minus Depreciation 580 587 604 628 660 674 688 702 715 Selling, general and administrative expenses 703 699 721 766 781 798 814 831 847 Research and development expenses 219 215 235 255 264 270 275 281 286 Asset impairments and restructuring charges, netPlus Implied Interest on Op Lease 10 11 11 11 11 11 11 11 11EBITA 1,438 1,551 1,534 1,766 1,770 1,785 1,799 1,824 1,858

Less: Adjust TaxesMarginal Tax Rate 22% 23% 18% 18% 18% 18% 18% 18% 0%Provision for Income Taxes 190 (99) 226 255 264 270 275 281 286 Plus Tax Shield on Interest Expense 55 55 42 46 46 46 46 46 - Plus Tax Shield on Implied Lease Int 2 2 2 2 2 2 2 2 -

Adjusted Taxes 247 (41) 270 303 312 317 323 329 286

Plus: Change in Deferred Taxes

305 (313) (9) 73 32 21 21 21 20

NOPLAT 1,496 1,279 1,254 1,536 1,491 1,489 1,496 1,516 1,592

Invested Capital Computation:Operating Current AssetsNormal Cash 181 191 437 747 970 1183 1366 1609 1752Net AR 1,211 1,386 1,483 1,557 1,635 1,717 1,803 1,893 2,082 Inventory 1,404 1,509 1583 1660 1716 1752 1788 1825 1860Other Current Assets 70 57 73 74 77 79 80 82 83Operating Current Assets 2,866 3,143 3,576 4,039 4,398 4,731 5,037 5,408 5,778

- - Opperating Current LiabilitiesAP 704 842 1,608 867 896 916 934 953 972 Other Current Liabilities 646 578 - 798 825 842 860 877 894 Operating Current Liabilities 1,350 1,420 1,608 1,665 1,721 1,758 1,794 1,831 1,866

Net Operating Working Capital 1,516 1,723 1,968 2,374 2,676 2,973 3,243 3,577 3,912

Plus Net PPE 5276 5607 5600 5880 6174 6483 6807 7147 7505

Plus PV of Operating Leases 227 271 271 285 299 314 329 346 363

Other Intangibles 2,469 2,373 2,185 2,119 2,056 1,994 1,934 1,876 1,820 Less Other Operating Liabilities 534 519 519 519 519 519 519 700 701

Invest Capital 8,954 9,455 9,505 10,139 10,686 11,245 11,795 12,247 12,899

ROIC 17.60% 14.28% 13.27% 16.16% 14.70% 13.94% 13.30% 12.85% 13.00%ROIC = NOPLAT/INVESTED CAPITALEP 919.6 671.7 613.3 891.4 803.0 764.5 733.2 715.9 761.8EP = INVESTED CAPITAL * (ROIC-WACC)FCF FCF = NOPLAT - Change in Invested Capital 1,040 778 1,204 902 943 931 945 1,064 940

Eastman Chemical CompanyDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 1.34% Dividend Payout 2.22% CV ROIC 13.00% WACC 6.78% Cost of Equity 8.46%CV ROE 15.23%Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E

DCF ModelNOPLAT 1536 1491 1489 1496 1516 1592FCF 902 943 931 945 1064 940CV 26248PV FCF 845 827 764 727 766 18907

Value of Operating Assets 22,838

- Total Debt 6,168 - Other Long Term Liabilities 553 - PV Op Lease 285 - Underfunded Pension 220 Value Of Equity 15,612 Shares Outstanding 139.8 Intrinsic Value 111.67 Partial Year Adjustment 113.35

EP Model

Economic Profit 891 803 765 733 716 762CV 14002

835 704 628 564 516 10086PV FCF 13,332 Beginning Invested Capital 9,505 Value Of Operating Assets 22,838

- Total Debt 6,168 - Other Long Term Liabilities 553.2 - PV Op Lease 284.63 - Underfunded Pension 220.00 Value of Equity 15612Shares outstanding 139.8Intrinsic Value 111.67Partial Year Adjustment 113.35

Eastman Chemical CompanyDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E 2024E

EPS 8.67$ 8.73$ 9.03$ 9.30$ 9.69$ 10.18$

Key Assumptions CV growth 2.05% CV ROE 14.54% Cost of Equity 8.46%

Future Cash Flows P/E Multiple (CV Year) 13.41 EPS (CV Year) 10.18$ Future Stock Price 136.58$ Dividends Per Share 2.48$ 2.58$ 2.68$ 2.78$ 2.88$ Future Cash Flows 2.48$ 2.58$ 2.68$ 2.78$ 2.88$

Discount Rate 1.08457 1.176292 1.275771 1.383663 1.500679 1.500679 Discounted Cash Flows 2.29$ 2.19$ 2.10$ 2.01$ 1.92$ -$ Discounted Terminal 91.01$ Intrinsic Value 101.52$ Partial Year 103.05$

Eastman Chemical CompanyRelative Valuation Models

EPS EPSTicker Company Price 2018 2019E P/E 18 P/E 19HUN Huntsman Corporation $24.79 $3.35 $2.85 7.4 8.7 WLK Westlake Chemical $75.53 $8.43 $7.06 9.0 10.7 CE Celanese Corporation $103.74 $11.06 $10.53 9.4 9.9 POL PolyOne Corporation $33.92 $2.41 $2.59 14.1 13.1 VVV Valvoline Inc. $19.41 $1.29 $1.33 15.0 14.6 FMC FMC Corp $88.51 $6.07 $5.71 14.6 15.5

Average 11.6 12.1

EMN Eastman Chemical Company $84.45 7.68 8.67 11.0 9.7

Implied Value: Relative P/E (EPS18) $ 88.85 Relative P/E (EPS19) 104.62$

Eastman Chemical CompanyWeighted Average Cost of Capital (WACC) EstimationEquity Risk Premium 4.95%10 Year Treasury 2.72%Beta 1.16Equity Value 11,715 Debt Value 6,403 Equity % 64.66%Debt % 35.34%Pre Tax Cost of Debt 4.53%Cost of Equity 8.46%Tax Rate 18%

After Tax cost of debt 3.71%

WACC 6.78%

Eastman Chemical CompanyKey Management Ratios

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Liquidity RatiosCurrent Ratio Current Assets/ Current Liabilities 1.60 1.59 1.76 1.79 1.91 2.01 2.11 2.22 2.33Quick Ratio Cash + Short term Inventory + AR/ Current Liabilities 0.78 0.80 0.94 1.02 1.13 1.23 1.33 1.44 1.55Cash Ratio Cash/Current Liabilities 0.10 0.10 0.21 0.33 0.42 0.50 0.57 0.66 1.32

Activity or Asset-Management RatiosReceivables Turnover Sales/ Average AR 8.01 7.35 7.08 7.00 6.89 6.70 6.51 6.33 6.00Inventory Turnover COGS / Average Inventory 4.22 4.47 4.57 4.46 4.46 4.45 4.46 4.47 4.46Payable Turnover Purchases / Average Accounts PayableFinancial Leverage RatiosDebt to Equity Total Debt / Total Equity 143% 119% 105% 94% 87% 81% 78% 72% 67%Financial Leverage Ratio Total Assets / Average Total Equity 3.58 3.17 2.86 2.74 2.60 2.50 2.43 2.37 2.29

Profitability RatiosGross Profit Margin Gross Profit/ Revenue 26.1% 25.7% 24.4% 26.1% 25.5% 25.3% 25.1% 25.0% 25.0%Operating Margin Operating Profit / Revenue 15.4% 16.0% 14.6% 16.2% 15.7% 15.5% 15.3% 15.2% 15.2%Return on Equity Net Income / Avg Total Equity 19.8% 27.4% 19.1% 19.7% 18.0% 16.9% 15.9% 15.2% 14.5%Return on Average Assets Net Income / Avg Total Assets 5.5% 8.8% 6.7% 7.3% 7.0% 6.9% 6.7% 6.5% 6.5%Payout Policy RatiosDividend Payout Ratio Total Dividends / Net Income 32.7% 21.9% 29.6% 28.6% 29.6% 29.7% 29.9% 29.7% 29.3%Retention Ratio Net Income - Dividends / Net income 67.3% 78.1% 70.4% 71.4% 70.4% 70.3% 70.1% 70.3% 70.7%

111.67 1.06 1.11 1.16 1.21 1.26 1.31 1.36 111.67 2.09% 2.19% 2.29% 2.39% 2.49% 2.59% 2.69%4.80% 126.34 120.68 115.35 110.32 105.57 101.08 96.83 5.40% 256.52 264.52 273.16 282.51 292.67 303.76 315.884.85% 125.06 119.41 114.10 109.10 104.37 99.90 95.66 6.40% 195.59 200.22 205.14 210.38 215.98 221.97 228.394.90% 123.79 118.17 112.88 107.89 103.18 98.73 94.52 7.40% 154.37 157.24 160.27 163.45 166.82 170.37 174.14

Risk Premium 4.95% 122.55 116.94 111.67 106.70 102.02 97.58 93.38 Cost of Equity 8.40% 124.65 126.51 128.46 130.50 132.64 134.87 137.225.00% 121.32 115.73 110.48 105.53 100.86 96.45 92.27 9.40% 102.21 103.45 104.75 106.10 107.50 108.97 110.495.05% 120.11 114.54 109.31 104.38 99.73 95.33 91.17 10.40% 84.67 85.52 86.40 87.31 88.26 89.23 90.255.10% 118.91 113.36 108.15 103.24 98.61 94.23 90.09 11.40% 70.60 71.19 71.79 72.41 73.05 73.71 74.39

CV NOPLAT GROWTH111.67 1.06 1.11 1.16 1.21 1.26 1.31 1.36 111.67 2.09% 2.19% 2.29% 2.39% 2.49% 2.59% 2.69%

2.51% 127.47 121.56 116.02 110.80 105.88 101.24 96.84 9.55% 113.04 114.14 115.30 116.50 117.77 119.09 120.482.56% 126.24 120.41 114.94 109.78 104.92 100.33 95.99 10.55% 116.67 118.03 119.45 120.94 122.49 124.12 125.832.61% 125.03 119.28 113.87 108.78 103.97 99.43 95.14 11.55% 119.67 121.24 122.88 124.60 126.40 128.28 130.26

Risk Free 2.66% 123.84 118.16 112.82 107.78 103.03 98.55 94.30 CV ROIC 12.55% 122.19 123.94 125.77 127.68 129.68 131.78 133.982.71% 122.67 117.05 111.78 106.80 102.11 97.67 93.47 16.31% 128.90 131.13 133.45 135.88 138.43 141.09 143.892.76% 121.50 115.96 110.75 105.83 101.19 96.80 92.64 17.31% 130.20 132.52 134.94 137.47 140.11 142.89 145.802.81% 120.36 114.88 109.73 104.87 100.28 95.94 91.83 18.31% 131.35 133.75 136.26 138.87 141.62 144.49 147.50

WACC COE111.67 3.57% 4.57% 5.57% 6.57% 7.57% 8.57% 9.57% 10.57% 11.57% 6.78% 6.00% 7.00% 8.40% 9.00% 10.00% 11.00% 12.00% 13.00% 14.00%

3.55% 245.89 153.76 105.20 75.20 54.83 40.09 28.94 20.20 13.16 2.00% 4.46% 5.10% 6.01% 6.39% 7.04% 7.69% 8.33% 8.98% 9.62%4.55% 281.46 177.17 122.24 88.35 65.37 48.76 36.21 26.39 18.51 2.50% 4.60% 5.25% 6.15% 6.54% 7.19% 7.83% 8.48% 9.12% 9.77%5.55% 304.22 192.14 133.14 96.76 72.10 54.30 40.86 30.36 21.93 3.00% 4.75% 5.39% 6.30% 6.69% 7.33% 7.98% 8.62% 9.27% 9.92%

ROIC 6.55% 320.03 202.54 140.71 102.60 76.78 58.16 44.09 33.11 24.30 COD 3.50% 4.89% 5.54% 6.44% 6.83% 7.48% 8.12% 8.77% 9.42% 10.06%7.55% 331.65 210.19 146.28 106.90 80.23 60.99 46.47 35.13 26.05 4.14% 5.08% 5.73% 6.63% 7.02% 7.67% 8.31% 8.96% 9.60% 10.25%8.55% 340.55 216.05 150.54 110.19 82.86 63.16 48.29 36.68 27.38 4.50% 5.18% 5.83% 6.74% 7.12% 7.77% 8.42% 9.06% 9.71% 10.36%9.55% 347.58 220.68 153.92 112.79 84.95 64.87 49.73 37.91 28.44 5.00% 5.33% 5.98% 6.88% 7.27% 7.92% 8.56% 9.21% 9.86% 10.50%

10.55% 353.29 224.43 156.65 114.90 86.63 66.26 50.89 38.90 29.30 5.50% 5.47% 6.12% 7.03% 7.41% 8.06% 8.71% 9.35% 10.00% 10.65%11.55% 358.00 227.53 158.91 116.64 88.03 67.41 51.86 39.72 30.01 6.00% 5.62% 6.27% 7.17% 7.56% 8.21% 8.85% 9.50% 10.15% 10.79%12.55% 361.97 230.14 160.81 118.10 89.20 68.37 52.67 40.41 30.60 6.50% 5.76% 6.41% 7.32% 7.70% 8.35% 9.00% 9.65% 10.29% 10.94%

NOPLAT G111.67 1.60% 1.70% 1.80% 1.90% 2.00% 2.10% 2.20% 2.30% 2.40%66.00% 114.73 116.17 117.67 119.24 120.87 122.57 124.34 126.19 128.1367.00% 114.91 116.37 117.89 119.47 121.12 122.84 124.63 126.50 128.4668.00% 115.10 116.58 118.11 119.71 121.37 123.11 124.92 126.81 128.79

COGS 69.00% 115.29 116.78 118.33 119.94 121.62 123.38 125.21 127.12 129.1270.00% 115.47 116.98 118.55 120.18 121.88 123.65 125.50 127.43 129.4571.00% 115.66 117.18 118.76 120.41 122.13 123.92 125.79 127.74 129.7872.00% 115.84 117.38 118.98 120.65 122.38 124.19 126.08 128.05 130.1173.00% 116.03 117.58 119.20 120.88 122.63 124.46 126.37 128.36 130.4474.00% 116.22 117.79 119.42 121.12 122.89 124.73 126.66 128.67 130.7775.00% 116.4029 117.9871 119.6348 121.3501 123.1371 125.0005 126.9453 128.9768 131.101070476.00% 116.5891 118.1888 119.8527 121.5847 123.3893 125.2709 127.2347 129.2862 131.431271477.00% 116.7752 118.3904 120.0705 121.8194 123.6414 125.5413 127.5242 129.5956 131.7614724

CV Noplat GrowthBeta

Beta