Eastman Chemical Company (EMN: Buy, $111 PT) 
Approaching the Promised Land?
• The case for a (higher) multiple has strengthened in our view. For many years Eastman has consistently upgraded its portfolio with little to show for it, i.e. the stock’s relative trading multiple has generally not expanded in kind. Instead, shares have continued to trade at a wide discount to the sector, never mind the “promised land” of higher flying specialty chemical peers. It is frankly difficult to say when the market may be more willing to pay for Eastman’s portfolio upgrades – perhaps divestiture of the company’s remaining commodity exposure will be required to make the case in full. Nevertheless, as we exit the company’s Innovation Day in New York, we do think that Eastman has made a credible case for sustainable growth at above-market rates, based on an attractive, focused pipeline of new specialty products. Meanwhile, this underlying growth should be more apparent to investors as the company’s beleaguered Fibers business begins to stabilize in 2018+. What is more, management is doing and saying the right things as it relates to capital deployment: no large acquisitions, moderate capex, and share repurchases that could nearly double in 2018 as we discussed in our preview (click here). On balance, this combination may be enough to shrink the valuation discount to the broader sector. If that happens, our target of $111 (14% upside) will likely prove to be too conservative.
• Share repurchases could double as FCF rises and capex wanes. Eastman unveiled a new $2bn share repurchase authorization to be executed over the next three years. If executed ratably this would imply repurchases of $667mn in 2018, which is not quite double the level of $350mn in 2017, but it’s close. Looking ahead, management foresees $3.5bn of FCF through 2020 (vs. VRP at $3.61bn) of which $2.0bn is earmarked for repurchases, $1.0bn for dividend distributions and $0.5bn for de-leveraging and perhaps...
• Innovation was front and center, as expected. Generally speaking, Eastman is not perceived by many investors to be an especially innovative chemical company, yet the company has enjoyed important successes in the recent past (e.g. Tritan) and is rightly proud of R&D efforts that delivered $300mn in new business revenue in 2017. Looking ahead, Eastman expects to grow this contribution to $500mn in new business revenue via a three-pronged strategy of...
• Taking a step back, two specialty segments now account for 70% of Eastman’s EBIT. Additives & Functional Products in particular delivered impressive volume growth of 10% in 2017 (and an estimated 7-8% exclusive of channel loading of heat transfer fluids for use in solar), while Advanced Materials grew volume at a healthy rate of 5%. These two segments...
• What about divestiture of remaining commodity assets? Management had been working for years to divest a portion of its ethylene assets. In broad strokes, Eastman makes twice as much ethylene as it needs, so the company could explore a divestiture of its medium-sized cracker (estimated capacity 850mn lbs/yr), or...
• We affirm our Buy on EMN shares and our target of $111. Our price target suggests upside potential of 14% including a dividend yield of 2.3%. Eastman offers top quartile 2018 FCF yield at 8.3% coupled with a well below-average P/E multiple at 11.7x our estimate of 2018 EPS, a 27% discount to the sector average. As a reminder, we value Eastman based on an average of three methodologies; DCF analysis, a relative P/E framework, and a relative EV/EBITDA framework. Our DCF suggests a warranted stock price of $124. Using our relative valuation framework, our P/E multiple implies a fair value of $112 while our EV/EBITDA implies a fair value of $96 per EMN share.
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Axalta Coating Systems, Ltd. (AXTA: Hold, $31 PT) 
Two Steps Forward in Performance Coatings
• Axalta closes out 2017 on a relative high note. Adjusted EBITDA of $245mn beat our $237mn estimate. The better than expected operating performance was the result of a stronger sales and margin profile. This brings us to our view that the company took two steps forward in Performance Coatings. The first is improving volume trends in auto refinish coatings. While volumes were still negative for the quarter, a remaining hangover from customer destocking appears to be the culprit. With that headwind having passed as of October, we expect volumes and profitability to normalize in 2018. The second step forward is growing traction on price, up 2.5% from 0.9% in 3Q17. The net result of the improved backdrop was a segment EBITDA margin of 22.6%, essentially flat y-y and 170bps better than we had penciled in. Progress in Performance Coatings was partially offset by weakness in Transportation, where some traction is evident, but progress is slower given a more competitive backdrop. We continue to believe that raw material costs will remain a challenge for AXTA and other coatings producers in 2018. However, the company believes it can close the gap by 2H18 if raw material costs were to ease as they currently expect. Despite the improving backdrop, we continue to see Axalta as fairly valued and thus maintain our Hold rating with a price target of $31.
• Top 10 takeaways: (1) 4Q17 adjusted EPS of $0.37A exceeded our $0.32E and consensus of $0.31; (2) adjusted EBITDA was a $0.03 tailwind vs. our estimate as a $0.05 beat in Performance Coatings was partially offset by a shortfall of $0.02 in Transportation Coatings; (3) Refinish saw the remains of inventory destocking at the customer level in October, with subsequent improvement into February; (4) Light vehicle Transportation sales price was still negative in 4Q, though the headwind moderated sequentially; (5) raw material inflation is expected to run +10% in 2018 (SHW estimated industry level raw inflation would be 4-6%); (6) share count creep is expected to continue with 2018 shares outstanding to average 249mn, up 1% from 4Q17 and up 8% since 2014; (7)...
• We are adding a nickel to 2018 EPS. Following the better than expected 4Q results and improving fundamental backdrop in the Performance Coatings segment, we increase our 2018 EBITDA estimate to $969mn from $937mn on higher sales and better margins projected for Performance Coatings. This revision is only partially offset by lower expectations from Transportation Coatings, where we took down our margin estimates. Below the line, interest expense is expected to increase y-y by $18mn as the company’s leverage profile weighs on income as interest rates rise. These expenses offset the benefit of a lower tax rate of 20% vs. our prior projection of 22.5%. The net result of these changes is a 2018 EPS estimate that increases to $1.35 from $1.30. 
• We maintain a Hold rating with a price target of $31. Our target implies total return potential of 2% (AXTA shares do not currently pay a dividend). Even after the positive revisions, Axalta still trades on par with closest peer PPG based on a 2018 EBITDA multiple and retains a P/E multiple premium of 4.9x. Given Axalta’s elevated exposure to autos and more limited balance sheet flexibility, we do not feel this valuation level warrants a more constructive posture at this time. As a reminder, our valuation of AXTA is based on an average of two methodologies: DCF analysis and a relative P/E framework. Our DCF analysis suggests a warranted stock price of $30. Using our relative P/E framework wherein we apply a 30% premium to the S&P500 multiple, we calculate warranted value of $31 per AXTA share. 
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Olin Corporation (OLN: Buy, $40 PT) 
4Q Light as Winchester Fires Blanks; Guides 2018 EBITDA 4% below Street
• Operating earnings missed our forecast in all three segments. Olin posted 4Q GAAP EPS of $2.89. Based on estimated after-tax effects of restructuring charges ($10.4mn), a gain on the sale of a manufacturing facility ($2.4mn) and one-time tax benefits ($437.9mn), we estimate adjusted EPS of $0.35, which compares to our $0.48E and consensus of $0.44. Operating EBITDA of $278mn is also weaker than the $286mn that we had expected and consensus of $288mn. Adjusted EBIT for 4Q was an even larger, $22mn, miss vs. our estimates, as profitability suffered from an elevated D&A expense, which represented a $16mn, or $0.07 per share incremental headwind to our estimate. On a segment basis, earnings missed across all three operating units, with the largest variance in Winchester, which suffered a substantial decline in profitability. Partially offsetting this weakness was lower corporate expense and what we estimate to be a lower than expected tax rate. Hurricane Harvey-related headwinds totaled $12mn, in line with the $10-$15mn that we had expected. Net debt declined nearly $100mn on the quarter, bringing year-end 2017 leverage to ~2.7x 2018E EBITDA.
• Initial 2018 guide is below Street and back-end loaded. We are not shocked by the guide given the company’s inability to deliver the $1bn in EBITDA set forth for 2017. For 2018 Olin put forth EBITDA of $1.25bn +/- 5%, implying a range of $1.19-1.31bn, the midpoint of which comes in below our $1.31bn forecast and the street’s consensus of $1.30bn. Olin’s preliminary capex forecast of $375-425mn is a bit higher than the $370mn we had penciled in. Meanwhile, a seemingly endless stream of maintenance work continues, with 1Q18 expected to see turnaround expenses of $90mn, about double the 1Q17 level. That said, the schedule should ease following 1Q, with full year 2018 maintenance costs expected to be down $30mn y-y. On a segment basis, in chlor-alkali and epoxies, Olin foresees improved profitability on the back of higher prices and favorable supply and demand dynamics. These benefits are to be offset partially by higher raw material costs (ethylene, benzene, and propylene). Despite ongoing weakness in Winchester, Olin does bake in improvement there as well in 2018.
• Chlor-alkali & Vinyls (CAV) margins drive miss. In EPS terms, Olin’s 4Q17 EBIT of $136mn was a $0.08 headwind vs. our forecast of $152mn. Margins on the Q of 14.8% increased only 10bps sequentially (vs. the 230bps we anticipated) despite higher market prices for caustic and lower maintenance and outage expenses q-q. While we believe lower EDC prices are at least partially to blame for the weakness, D&A expense for the segment increased by $7mn sequentially and represented an additional headwind of 80bps of margin, or $0.04 of EPS. Looking ahead, we expect caustic soda contract prices to rise by $10 per ton, or ~2%, in 1Q vs. 4Q with 2018 average prices up $107 per ton, or 22% y-y. Additionally, US EDC prices have shown some signs of strength due to a force majeure at Braskem, though we believe any strength here will be more temporary in nature. We also anticipate elevated costs in January as US Gulf Coast CAV producers have seen freezing conditions cause operational and logistical hang-ups. 
• Epoxies finished 2017 near breakeven. Operating profit for Olin’s Epoxy business of -$1mn represents the fifth consecutive quarterly loss, missing our $4mn. While we believe epoxy industry fundamentals improved over the quarter, Olin had to contend with elevated maintenance costs of $16mn, Hurricane Harvey-related expenses of $9mn, and a $2mn increase in D&A. Looking forward, we expect profitability to improve as prices for liquid epoxy resins continue to move off of the lows. We do note that PDH facility outages at DowDuPont and Enterprise drove average propylene prices up ~25% in January vs. 4Q17, though supply constraints have since abated and propylene costs have eased in recent weeks. 
• Winchester results remain a concern. While sales in the Winchester segment grew 2.5% y-y, EBIT of $11mn plummeted over 55% and is just over half of the $21mn that we had anticipated. Margins of 6.7% dropped over 250bps q-q and a remarkable 880bps y-y. Management cites mix issues, softer retail/commercial volumes, lower product pricing, and elevated raw material costs as primary drivers. Unfortunately, we expect higher raw material costs to remain a headwind, at least through 1Q18. If volumes do not pick up, our concern is that any efforts to raise prices may come up empty.
• Winchester results remain a concern. While sales in the Winchester segment grew 2.5% y-y, EBIT of $11mn plummeted over 55% and is just over half of the $21mn that we had anticipated. Margins of 6.7% dropped over 250bps q-q and a remarkable 880bps y-y. Management cites mix issues, softer retail/commercial volumes, lower product pricing, and elevated raw material costs as primary drivers. Unfortunately, we expect higher raw material costs to remain a headwind, at least through 1Q18. If volumes do not pick up, our concern is that any efforts to raise prices may come up empty.
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