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Company Overview Eastman Chemical Company (NYSE: EMN) is a global specialty chemical company producing a broad range of advanced materials, chemicals, and fibers, found in a variety of everyday products. EMN began business in 1920, originally producing chemicals for Eastman Kodak Company’s photographic business. It became a public company on December 31, 1993. EMN now has 45 manufacturing sites in 16 countries, with their largest headquarters in Kingsport, TN. EMN also has equity interest in joint ventures that supply chemicals, plastics, and fibers products to customers worldwide. Eastman is a large supplier to end markets such as transportation, building and construction, consumables and tobacco. Stock Performance Highlights 52 Week High $90.55 52 Week Low $70.38 Beta 1.67 Average Daily Volume 1,426,610 Share Highlights Market Capitalization $12.46B Shares Outstanding 148.48M Book Value per Share $26.04 EPS (ttm) $7.63 P/E Ratio 10.83 Dividend Yield 1.70% Dividend Payout Ratio 20.0% Company Performance Highlights ROA 7.83% ROE 28.43% Sales $9.44B

• EMN continues to shift its sales and product mix towards a greater focus on specialty chemicals. Since commodity products experience higher volatility, EMN can stabilize earnings through diversifying its portfolio to further include greater amounts of non-cyclical specialty products.

• Strategic acquisitions in high growth markets have provided EMN with opportunities for product innovations and expanded capacity. Additionally, EMN is set to acquire Taminco in Q2 2015, which will boost EMN’s growth in personal care, coatings, and oil and gas markets. EMN can utilize acquired companies’ expertise in highly specialized industries.

• Through EMN’s mid-market size, they are able to offer flexible and customized solutions for their customers, while also remaining competitive with larger players in the industry. EMN has the capital and innovative technologies of a large company, but is able to create modifications to existing products, meeting customer demands in unique ways, unmatched by that of larger chemical companies.

• EMN’s Operating Cash Flows in 2013 were $1.3B. Comparing Operating Cash Flows to Market Capitalization, Eastman has the highest ratio of its competitors at 11.80%. A continually strong Operating Free Cash Flow shows EMN’s core operations are performing well and contributing to overall company growth.

• EMN is focused on delivering sound returns to investors. Over the past 5 years, EMN has delivered a return of 229.03%, compared with the 5-year return of the S&P 500 of 93.03%. Management announced a $1 billion share repurchase program to be put in place starting in 2014.

Year Stock Performance

Analysts

Maddison Miller [email protected] JJ Ohlrich [email protected]

Brad Stimple [email protected] Katelyn Wheeldon [email protected]

Current Price: $83.95 Target Price: $95.10-$103.54

Stabilization Through Specialization

Krause Fund Research | Fall 2014 Materials Eastman Chemical Company

NYSE: EMN Recommendation: BUY

Figure 1

November 17, 2014

Through equity research, and both our intrinsic and relative valuation, we issue Eastman Chemical Company (NYSE: EMN) with a BUY rating. After 10 years of strategic acquisitions to grow into a less cyclical specialized chemical company, EMN holds leading market positions in 2/3 of its products. In the future, EMN will experience growth derived from utilizing the expertise of acquired companies and growing capacity in high-growth niche markets. EMN is in a unique position to acquire Taminco, the leader in alkylamines manufacturing, in Q2 2015, adding value to EMN’s AFI and A&P segments. EMN is poised to benefit from higher construction activity and a rebounding manufacturing industry. The opportunities to realize returns from EMN’s exposure in niche markets will make the company’s stock an ideal long-term investment for the Krause Fund.

We believe there are six macroeconomic indicators that will influence the future performance of EMN. These economic drivers are Gross Domestic Product, Interest Rates, Price of Oil, Price of Natural Gas, the Industrial Production Index, and Housing Starts. Gross Domestic Product Gross Domestic Product (GDP) is an indicator of overall economic health, representing the total dollar value of all goods and services produced over a specific time period, usually expressed as a quarter over quarter growth percentage. After a lagging Q1 of -2.1% growth due to harsh winter conditions, U.S. GDP grew by 3.5% in Q3 2014, as indicated in the chart belowiv. We expect U.S. GDP to grow 3.3% in the next six months due to a rebounding labor market and decreased oil prices influencing consumer spending. In the next 2-3 years, we expect annual GDP growth of 3.0% due to continued expansion stemming from heightened U.S. oil production. The chemicals industry accounts for 2.1% of GDP and is a cyclical industry, meaning earnings follow changes in commodities (namely gas and oil) and end-user demandxxxviii. EMN’s major end markets consist of the cyclical transportation, construction, and consumables industries.

Figure 2 Interest Rates Materials is a capital and research-intensive sector, and many firms source capital through debtxli. EMN is no exception, with a debt-to-equity ratio of 1.17xxxvii. Interest rates have a direct impact on the purchasing and financing decisions of companies. In a high interest rate environment a company may refrain from issuing debt due to higher borrowing costs, thus altering its capital structure by lowering its debt-to-equity ratio. As interest rates rise, GDP falls due to the multiplier effect from less consumers and producers spending money on goods. Additionally, higher rate levels impact EMN’s demand, as the majority of EMN’s consumers are highly levered capital-intensive manufacturing firms. The Materials sector is currently experiencing heightened levels of M&A activity, with acquiring companies becoming highly levered to pay for acquisitions. This increase in activity can be attributed to the low interest rate environment enabling companies to leverage themselves to pay for the acquisition of other firms. The 10-year yield is an important rate that the U.S. pays to investors to finance its debt, and is a benchmark rate for firms seeking to issue debt. As of November 17, 2014, the 10-year U.S. Treasury yield is 2.32% vii.

Figure 3

Executive Summary

Economic Outlook

Yields are influenced by Federal Reserve monetary policy. Yields increase when the Federal Reserve increases its target for the Federal Funds Rate, an overnight rate used by central banks to make loans to one another. The Federal Funds rate is viewed as the base rate of all other interest rates available to borrowers. The Federal Reserve has been holding the rate target at a low of 0.25% to encourage business activity and spur recovery in the wake of the financial crisis xxx. We expect that the Federal Reserve will begin to normalize monetary policy starting with an increased in the Federal Funds Rate target to 1.0% in Q2 2015, assuming wage growth reaches an optimal level to raise the inflation rate to the Federal Reserve’s 2.0% targetvii. By the end of 2016, we predict the Federal Funds target rate to approach 2.25%. Long-term we predict the U.S. Treasury yield will approach 5.0% in correlation with expected Federal Funds Rate increases. Based on this assumption, we foresee lessening M&A activity in chemical industry. As financing becomes more expensive, companies will shift away from inorganic growth, which requires higher levels of debt, and more towards organic growth. Price of Oil Oil is a major component of EMN’s production costs, comprising approximately 25.0% of raw materials input costsxv. The price of oil is extremely volatile due to new technological developments, political events, and global economic performance. The U.S. is currently the third largest oil producer and is quickly catching up to Saudi Arabia, the second largest producer. U.S. oil production is at a 30-year high, having risen by 1 million barrels per day (bbl/d) for the past year due to strong oil prices. However, this production boom has led to excess supply and decreased oil prices. As of November 17, 2014 West Texas Intermediate (WTI) was $75.82/barrel, coming back from a four-year lowlviii. U.S. shale production reached 9 billion barrels per day bbl/d for the first time since 1986lv. Lower prices may lead to less investment in U.S. shale in 2015xliii. There is uncertainty surrounding the amount of U.S. shale reserves and how long they will be operational. Moreover, OPEC faces challenges derived from prices below $100/barrel, posing questions on whether they will cut production to boost the price per barrel, or continue operating at current levelsxxxiv. We believe that OPEC will cut its production after its meeting at the end of November. Due to the increase in U.S. production, we foresee OPEC becoming less of an influence on oil prices. Although OPEC producing countries will likely cut production, we believe the current surplus in supply will continue to increase in 2015 due to further increases in U.S. production. We agree with the EIA outlook that forecasts U.S. oil production

reaching 9.4 bbl/d in 2015. We predict a slightly higher price of $78/barrel by January 2015, assuming OPEC cuts output. Within the next six months we see prices approaching $80/barrel.

Figure 4 Price of Natural Gas Natural gas demand is based upon commercial and residential use. Natural gas experiences seasonality through higher use in the winter months as a source of heat. The Henry Hub spot price averaged $3.78/million British Thermal Units (MMBtu) in October of 2014lv. Natural gas production is predicted to increase from 2.6 million bbl/d to 3.2 million bbl/d in 2015lv. We agree with the EIA that natural gas prices will rise slightly to $3.97/MMBtu in Q1 2015 due lower expected global demand for heating and an increase in production. Longer term, we predict a depressed price until 2018.

Figure 5 Natural gas makes up 50% of EMN’s energy supplyxxiii. If U.S. liquid natural gas values rise relative to the price of oil, EMN profitability would narrow due to EMN’s largest facilities being equipped to operate using natural gas. In fact, a change of $1 in natural gas prices would have an EPS impact of $0.31lvii. While other companies in the chemical industry have shifted facility capabilities towards ethane, a cheaper raw material, EMN continues production at their current facilities, which only have the ability to process propane. EMN is currently the only facility left on the U.S

Gulf Shores that is solely propane operated. The following chart compares the volatility in propane vs. ethane marginsiii.

Figure 6 Industrial Production Index The Industrial Production Index (IPI) measures the output and capacity utilization of the mining, manufacturing, electric, and gas industries ixxx. The IPI measures real output, expressed as a percentage in the base year, which is currently 2007v. The IPI can be an indicator of future inflation and can define turning points in the business cyclev. The IPI was at 104.9 for October 2014, down 0.1% from September 2014 but 4.0% above October 2013vi. The slight decline can be attributed to the decrease in capacity utilization from 79.2% in September 2014 to 78.9%. Despite this minor recess, capacity utilization has grown by 3.0% over the last 12 monthsvi. We estimate that the IPI will have slightly increased to 105.1 in two months due our belief that the U.S. economy will continue to improve, resulting in greater demand for manufactured goods. In the next six months we foresee the index slightly lower at 103.4 because of Europe’s low inflation causing U.S. exports to be more expensive, leading to lower global demand for U.S. products. Almost half of the output of the chemicals industry goes to U.S. manufacturing for use as raw materials in production, while the remaining output is exported globallyxxxviii. The state of the manufacturing industry impacts EMN’s earnings since EMN’s demand is derived from its manufacturing customers.

Figure 7 Housing Starts A housing start is registered at the start of construction of a new building intended primarily for residential useiv. Construction is EMN’s second largest end market, comprising 16.0% of total sales revenuexiv. EMN’s AFP segment provides chemicals used in the manufacturing of

paint, which is driven by the amount of construction activity. Housing starts dramatically declined from 2006 to 2008, and are now seeing a pickup in activity. Housing starts have been volatile as of recent. September 2014 housing starts increased by 6.30% after an August decline of 12.80%iv. In the coming months, we estimate that housing starts will decline to a level of 800 due to the expectation of another harsh winter similar to that of 2013. We foresee housing starts increasing once again to a level of 1000 at the end of Q2 2015 when building conditions will be more favorable. We do not expect starts to increase to pre-2006 levels of an average of 2000 each month before 2019.

Figure 8

Since the materials sector moves cyclically with the U.S economy, a stronger economy provides opportunity for growth within the materials sector. Given the current growth rate of real GDP around 3.5%, the outlook for the material sector is positiveiv. Additionally, the Materials sector reported the third highest earnings growth at 16.5%, further enforcing the strength of the sectorviii. The S&P 500 Materials experiences growth in line with the broad S&P 500, with a 13.03% and 16.81% one year return respectively. The following chart shows the historical prices of the indices over the past five years.

Figure 9

The U.S. is seen as being in the middle of the Expansionary (Mid) period of the business cycle and heading into the contractionary (Late) period. Materials have historically underperformed during the mid-period and over performed during late period due to their ability to remain relatively stable compared to other sectorsxxvii. We believe that

Capital Markets Outlook

Materials will likely underperform until mid-2015 and begin to over perform beginning in 2016.

Industry Overview The materials industry can be broken down into the following industry groups, according to the Global Industry Classification Standard: • Chemicals – Commodity Chemicals, Diversified

Chemicals, Fertilizers and Agricultural Chemicals, Industrial Gases, and Specialty Chemicals

• Construction Materials • Containers and Packaging – Metals and Glass

Containers, and Paper Packaging • Metals and Mining – Aluminum, Diversified Metals and

Mining, Gold, Precious Metals and Minerals, and Steel • Paper and Forest Products The Materials sector makes up 3.5% of the S&P 500 Index, as of November 17, 2014il.

Figure 10 Sub-Industry Diversified chemicals is a sub-industry that focuses operations on converting raw materials and/or feedstocks derived from oil, natural gas, metals, materials, and air into more valuable products used in industrial and consumer marketsxxxviii. This industry is currently in the mature lifecycle stage because of the amount of consolidations within the industry, consisting mainly of established firms acquiring specialty firms as a way to gain market share. Additionally, diversified chemicals is cyclical in nature due to the cyclical nature of its main consumers in the construction, automobiles, and industrial manufacturing industries. The level of concentration in diversified chemicals is low, with the top three players accounting for less than 5.0% of total industry revenue thus far in 2014xxxviii. Diversified chemicals is a fragmented sub-industry comprised of both large and small players that offer a variety of products. EMN is considered a medium-size company within the industry, as it competes against both niche specialty companies and large commodity companies. Product Lines The diversified chemicals sub-industry is comprised of commodities and specialty companies. Commodities are characterized by having higher volume of capacity due to the

greater need for commodities across a broad range of industries. Specialties have a focused market, resulting in lesser demand and lower volume of capacity than commoditiesxxxviii. Products are classified according to consumer use into the following lines: petrochemicals, plastics, chlor-alkalis, and fertilizers. Major end markets that use chemical products include construction, automobiles, agriculture, and industrial manufacturing. Recent Trends and Developments The diversified materials industry has witnessed increased demand from emerging markets, heavy consolidation, and stringent environmental regulation. Emerging Markets As the graph below indicates, by 2020 it is expected that the percentage of global demand for chemicals will increase for emerging markets, with a significant increase in demand from China. Demand will increase in emerging markets due to the growing middle class having greater purchasing ability. Increased demand will cause an increase in the production of consumer products that use chemicals as an input. Many players, including EMN, are investing in and moving production facilities abroad to capitalize on the faster growth and lower costs associated with certain end markets.

Figure 11 Consolidation Since the global recession, there has been an upturn in consolidation activity amongst industry players. EMN has contributed to this activity by acquiring Solutia in 2012 and engaging in numerous global joint ventures. When companies merge they can create synergies that reduce operating costs and achieve greater efficiencies in procurement of materials and logisticsxxxviii. Consolidations offer an alternative way to using capital to build large-scale plants. A trend in the industry is to divest commodity product lines and focus on more specialized high profit margin segments. EMN did this in 2012, when it divested its Performance Polymers division. Government Regulation The Chemicals industry is subject to strict rules regarding greenhouse gas (GHG) emissions and toxic waste. Such regulations include the Clean Air Act, Clean Water Act, and Resource Conservation and Recovery Act. Chemical

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Industry Analysis

producers have incurred major costs for compliance and to develop strategies to reduce, treat, and dispose of hazardous wastexxxviiii. In fact, the industry has implemented the Responsible Care Program to improve its image and avoid further costly regulations. This initiative supports continuous improvement in health, safety, and environmental performance combined with transparent shareholder communicationxxxi. A commitment to the program allows players to focus on continuous improvements and avoid expensive disasters. Members in compliance account for 90% of global chemical salesxxxi. EMN is a member of the program, and was named the 2013 Responsible Company of the Yearxiv. Markets and Competition To determine industry leaders it is pertinent to examine the company’s capacity utilization, product mix, and research and development (R&D) initiatives. Capacity utilization is critical, as chemical companies have high fixed costs. Using the most of capacity results in greater operational efficiencies, as greater capacity usage brings a company closer to its production potential. Major players in the diversified chemicals industry offer a wide range of products that can be used by a variety of end markets. Industry leaders offer substitutable products, mitigating the chance that a consumer will switch to a competitor due to lack of product offeringsxxxviii. R&D is critical for continued growth of a company, as current product lines can become overtaken by competitors in the future. Leaders with stronger R&D capabilities can develop sophisticated technology that allow for strengthened sustainable operations in compliance with governmental regulation. Furthermore, an important feature of the industry is the relationships between suppliers and consumers. The industry continues to create innovative products to solve consumers’ complex problems Consumers often need specialized products and work with suppliers to create products that meet their needs. Leaders with the greatest R&D capabilities are able to create such customized solutions because they have the resources to conduct research to determine viable options for consumers. Below is a graph showing the 2013 R&D expense to sales ratio. EMN is competitive compared to similar firms.

Figure 12

Porter’s Five Forces 1.) Industry Competition: STRONG due to commodity inputs being available from limited sources. Competition is cost-driven, leaders in the industry are those who can utilize capacity and implement cost-saving strategies. 2.) Threat of New Entrants: WEAK due to the high start-up costs associated with the capital-intensive nature of the industry and high government regulation. Players need to have significant amounts of capacity to remain competitive with major players who utilize large capacities to create economies of scale. 3.) Threat of Substitutes: WEAK due to chemicals being a fundamental raw materials input of a variety of downstream consumers. Further, buyers often require chemicals with specific composition. If a choice exists among products, it is likely that the same player manufactures them. 4.) Bargaining Power of Suppliers: MODERATE due to reliance on commodities that are available through few large-scale oil and gas and mining companies. However, raw materials are undifferentiated and price is a major factor when players choose a supplier. 5.) Bargaining Power of Consumers: MODERATE due to the majority of customers being large firms with modest negotiating and financial positions. However, the use of long-term contracts deters consumers from incurring early termination costs to switch suppliers. Diversified Chemicals Leaders The chart below shows a relative comparison of the leading firms within the Diversified Chemicals sub-industry.

Figure 13 In terms of market capitalization, there exists a wide range in the size of players. Market capitalizations differ due differences in variety and types of products offered to diverse end markets. DD and DOW have a strong focus on agrichemicals, while EMN focuses more on plastics and fibers. In comparing P/E ratios, EMN appears to be cheaper relative to its competitors. All players listed are slightly below the industry average P/E ratio of 16.7 xxxvii. Similar P/E ratios signal that the players are in the same life cycle stage and have relatively similar growth expectations. EMN, DOW, and CE have debt-to-equity ratios that are higher than the industry average of 0.86xxxvii. EMN’s debt-to-equity ratio is significantly higher than its competitors,

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with the exception of CE. EMN is heavily levered as it has been engaged in acquiring product lines and entire companies and still has $985 million in debt from its Solutia acquisition. EMN is exposed to greater interest rate risk than less levered competitors with a larger proportion of equity financing in their capital structure. EMN has emphasized that it is committed to returning profits to shareholders through repurchases and dividend payouts, which will shift the debt-to-equity ratio and likely result in a lower cost of borrowing. There is a wide range of ROE amongst the players. The industry average ROE is 20.9% xxxvii. With the exception of CE and ASH, all players are in line with the industry average. This is a signal that these leading players have the capabilities to deliver solid returns to shareholders. We anticipate EMN’s ROE will grow in the future as it uses its innovative capabilities to develop products in new markets that it has gained exposure to through recent acquisitions. Sub-Industry Outlook The U.S. economy is expected to continue its recovery through projected growth of 3.1% in 2015xxxii. Growth forecasts for the diversified chemicals industry are aligned with U.S. growth projections. Industry revenue is expected to grow at 3.1% annually through 2019 to $171.7 billionxxxviii. Lower energy prices will benefit the industry, but players who act as suppliers to oil producers will encounter challenges ahead if the price of oil drops below what is needed for oil producers to remain profitable, presumed to be $70/barrelxlvii. Continued growth in international demand will further focus players to diversify into emerging markets. Demand in Asia will continue to be greater than demand in developed countries.

Eastman Chemical Company (NYSE: EMN) is a global specialty chemical company producing a broad range of advanced materials, chemicals, and fibers. EMN products can be found in a variety of everyday products, including plastic packaging, automobile parts, food, clothing, and tobacco. EMN began business in 1920, originally producing chemicals for Eastman Kodak Company’s photographic business. EMN became a public company on December 31, 1993. EMN is incorporated in Delaware and headquartered in Kingsport, TN. EMN serves customers in over 100 countries through its 45 manufacturing sites in 16 countries. The company is focused on growing capacity, expanding distribution, and accessing high-growth end markets through acquiring companies and establishing joint ventures. In 2012, EMN acquired the plastics company Solutia giving it greater access to Asia and Latin America. EMN is currently in negotiations to acquire Taminco, the world’s leading producer of alkylamines. EMN will be able to further develop its product mix by utilizing the niche industry expertise of acquired companies while providing its own innovative capabilities.

Corporate Strategy EMN is focused on continuing to develop its business to focus on high-value and diverse portfolio of specialty products that can consistently deliver increased earnings and free cash flows at rates greater than GDPxviii. EMN seeks to develop by concentrating on three core strategies relating to innovation, productivity, and product portfolio. Sustainable Innovation Consumers are seeking ways to enhance performance and durability while improving environmental and safety characteristics. EMN is on track to meet its 2015 goal to have 2/3 of revenues from new product launches that are from sustainability advantageous products. EMN currently stands with 60% of new product revenue coming from products meeting the sustainability standards. In 2013, EMN introduced six new sustainably advantageous productsxxii. Productivity EMN recognizes that its manufacturing processes require significant amounts of energy, and is working to develop more sustainable energy methods while growing capacity. EMN is committed to reducing its energy intensity by 20% and hazardous waste by 15% by 2020. EMN’s commitments resulted in 2013 energy savings of more than $3 million. For the third consecutive year, EMN was named an ENERGY STAR Partner of the Year by the EPA.EMN is the only chemical company to receive the award more than once xxxii. Product Portfolio EMN currently has a leadership position in product lines that generate 2/3 of its revenues, and strives to develop higher leadership in both its remaining current and future lines xiv. EMN strives to expand its product portfolio through greater expansion into specialty markets via acquisitions and joint ventures, in addition to strong organic growth. Recent acquisitions, including the acquiring of Commonwealth Laminating & Coating, have allowed EMN to expand product offerings and improve manufacturing efficiencies while accessing the expertise of acquired companies. Financial Summary Through the Solutia acquisition, EMN has grown EPS to levels that the company has never before experienced. 2013 EPS were $7.93, compared with the five year average of $3.22. EMN continues to deliver returns to shareholders through stock repurchases of $238 million in 2013 and increasing cash dividends over the last three years. EMN’s Board of Directors approved a $1 billion share buyback to be fulfilled in the coming years. EMN’s debt-to-equity ratio is higher than the industry at 1.17 due in part to $985 million left in long-term borrowings related to the Solutia acquisition in 2012. However, this high ratio should not raise concern of EMN’s ability to make payments due to the company’s strong operating cash flows of $1.3 billion. In fact, EMN has historically repaid debt early, with early repayments of over $500 million in 2010 and 2013. The chart below highlights key financial metrics for the past four years. It is apparent that the Solutia acquisition in 2012 had

Company Analysis

a significant impact on the company’s financials, primarily operating cash flows and debtxiv.

Figure 14 Product Lines EMN divides its products into five reportable segments. The chart below details the 2013 revenue by segment. EMN ranks first or second in all product lines.

Figure 15 Additives & Functional Products (AFP) Manufactures chemicals for products in the coatings and tire industries. Major end markets include transportation, construction, durable goods, and consumables. AFP sales have grown by over 25% in both 2011 and 2012 due to adding greater volume of products from Solutia and organic growth through a 40 million pound feedstock capacity addition in the Longview, Texas plant. During 2014, a rebound in the U.S. construction market has grown AFP revenues by 3.0% over the same time period in 2013xviii. Adhesives & Plasticizers (A&P) Focuses on manufacturing intermediate chemicals rather than finished products. Adhesive resins and plasticizers manufactured are used by EMN customers to manufacture products sold in the consumables, health, and construction industries. EMN is the world’s largest non-phthalate plasticizer manufacturer and ranks second in production of adhesives resins. Thus far in 2014, higher capacity utilization and stronger end-market demand for packaging products have increased sales by 4.0% over the same period in 2013xviii. Advanced Materials (AM) Produces specialty co-polyesters, cellulose esters, interlayers, and aftermarket window film products to end users in transportation, consumables, durable goods, and health.AM grew the most over the past four years, with growth over 39% in both 2012 and 2013, due to EMN providing customization of window films used in the

manufacture of automobilesxiv. The automobile manufacturing industry experienced increased U.S. sales due to low interest rates making financing options more affordable for consumersxlv. Fibers Manufactures acetate tow, acetate yarn, and plasticizers for end market use of manufacturing of cigarette filters, apparel, home furnishings, and industrial fabrics. EMN has been a leader in acetate manufacturing for over 75 years and has established long-lasting customer relations. Currently, EMN is the second largest supplier of acetate tow and the world’s largest producer of acetate yarnxiv. China’s smoking population is the highest in the world, with 300 million adult smokers. EMN’s long-standing relationship with China National Tobacco Corporation, the Chinese government-owned body that controls the Chinese tobacco industry, is a fundamental gateway to the Chinese marketxxiv. Specialty Fluid & Intermediaries (SFI) Produces heat transfer and aviation fluids, olefins, and chemical and polymer intermediaries for the industrial chemicals, construction, and agriculture industries. EMN possesses large capacities and vertical integration that allows for a leading market position in the majority of SFI core products. The addition of Solutia’s products increased 2011 and 2012 revenues by 7.0% and 8.0%, respectively. The 2014 purchase of BP’s aviation turbine oil products division helped boost Q3 sales by 5.0% over Q3 2013xviii. The following chart shows how each segment comprised total revenues for the past four years, and projections going forward. 2015 includes the Taminco acquisition, which will primarily impact AFP and SFI. For a detailed analysis of revenue growth through 2019, refer to Revenue Decomposition under Key Assumptions in Valuation Summary.

Figure 16 Markets & Distribution The chart below shows a breakdown of EMN’s end markets. Major markets are transportation, construction, consumables, and tobacco.

Financial Summary 2013 2012 2011 2010 Revenue 9.358B 8.064B 7.178B 5.798B Operating Cash Flows 1.297B 1.128B 625M 575M Debt 4.254B 4.779B 1.445B 1.598B EPS 7.93 2.92 4.56 2.96

Figure 17 EMN breaks down operations into four key markets: Latin America, Asia Pacific, North America, and Europe, Middle East, and Africa (EMEA). As detailed below, North America accounted for 46% of revenue in 2013. EMN has a strong presence in North America due to being headquartered in the U.S. and the region being very developed and in need of sophisticated chemical products that EMN produces.

Figure 18 Although North America accounts for the largest portion of revenue, EMN’s growth has shifted from North America to fast growing markets. As shown at the top of the next column, EMN significantly grew in the Asia Pacific region in 2012 and 2013 primarily due to the Solutia acquisition. Continued growth in the Asia Pacific region is expected due to a growing middle class demanding more products that require chemical inputs. Further growth in emerging markets will ease the dependence and concentration of revenues in North America that are contingent on the economic and regulatory conditions of the region.

Figure 19 Suppliers EMN has 6,500 global suppliers that provide the company with raw material inputs, materials for manufacturing and updating facilities, and distribution services. No one supplier accounts for a large portion of services or products to EMNxxxiv. Management In June 2014, Mark Costa assumed the position of Chairman and CEO. Costa has been with EMN since 2006, serving as Vice-President of Strategy, Marketing, and Business Development with a focus on A&P and AM. Costa is a key element in EMN’s continual shift toward a sustainable specialty chemical company through acquisitions and portfolio expansion. Former Chairman and CEO James Rogers currently serves as Executive Chairman of the Boardxiv. Major Shareholders Below is a chart detailing the top five shareholders. Ownership is comprised of 87% institutional and 42% mutual fundsxxxvi. No activist investors own EMN stock.

Figure 20 Research & Development EMN focuses on working with customers, chemical experts, and academics to create new innovations in developing products to fulfill customer needs. EMN continually explores and invests in R&D initiatives that are aligned with sustainability, consumerism, and energy efficiency. The Eastman Innovation Lab is a platform that helps customer create solutions to complex problems by combining EMN technology and expertise with customer inspiration. Additionally, EMN partners with various universities to fund research in chemistry and materials sciences to gain access to the latest innovations in chemical sciencesxxii. EMN has a diverse set of products and technological innovation initiatives that management expects to contribute

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to profitable future growth and sustained leadership positions. Divestitures EMN sold components of its Performance Polymers segment from 2006 to 2011. Performance Polymers produced chemicals used mainly in packaging applications and beverage containers. In 2011, EMN completed the sale of its Performance Polymers segment to DAK Americas, LLC. Cash proceeds from the sale were $615 million. Performance Polymers had been underperforming before EMN took strategic actionxxi. Selling the segment not only protected EMN from underperformance, but also moved the company forward in its quest to develop into a specialty company. Acquisitions EMN has focused on developing into a specialty chemicals company through 26 strategic acquisitions, including three 100% ownership transactions, over the past ten yearsxxxiii.The company completed the acquisition of Solutia in 2012 and is currently in the process of acquiring Taminco (NYSE: TAM). Solutia In July 2012 EMN completed a $4.8 billion acquisition of Solutia. The deal was financed through a $1.2 billion term loan of debt issuance, $700 million of EMN stock, and assumption of $1.5 billion of Solutia’s debt. Solutia shareholders received $22 in cash and 0.12 shares of EMN common stock. EMN captured tax advantages in the form of $1.3 billion in Net Operating Losses (NOLs) from Solutia. EMN also recognized $2,230 million in goodwill and $100 million in cost synergiesxiv. Solutia manufactures specialty chemicals used in auto glass and films, in addition to other productsxlvi. The acquisition primarily impacted the AM, AFP, and SFI segments and Asia Pacific and Latin America regions. The acquisition gives EMN an enhanced global platform for organic growth in key high-growth markets via technological and business capabilities. Taminco In September 2014, EMN agreed to buy Taminco in a $2.8 billion deal. EMN will assume $1 billion of Taminco’s debt. EMN has proposed a $26 share price to Taminco shareholders. To pay for the acquisition, EMN has proposed a debt offering that consists of the following notes.

Figure 21 The offering is expected to close on November 20, 2014. If EMN is unable to complete the acquisition by May 20, 3015 or if the merger agreement is cancelled, EMN will be

required to redeem all of the outstanding 2020 and 2025 notes at 101% of the principal amountsxvi. The vertical acquisition will provide EMN with greater access to non-cyclical niche end markets of agriculture, coatings, and oil and gas that are gaining from the trends of a growing world population, demand for high-performance products, and energy efficiencylvi. Taminco is a supplier to a variety of companies that are leaders in their respective industries, including Halliburton, Dow Chemical, and Procter and Gambleli. Additionally, EMN can leverage advantages created by shale gas by the addition of methylamines to its portfolio. Taminco is the largest global player in functional alkylamines market. EMN will gain access to Taminco’s 50% market share in methylamines capacity in North America and Europe. Displayed below is a chart highlighting how Taminco’s portfolio will affect revenues by marketiii. EMN’s revenues will still be heavily skewed toward construction, transportation, and tobacco. Taminco’s products will grow in the energy, fuels, and water segment from representing 3.0% of revenues to 5.0%.

Figure 22 EMN expects to realize synergies equal to 5% of Taminco’s 2013 sales over two years ($60 million). Management has projected a free cash flow in the two years following the acquisition of $1.5 billion and EPS accretion of $0.35 in 2015xxi. The acquisition will grow the AFP and SFI segments by 8.62% and 8.54%, respectively. North America, Asia Pacific, and EMEA will be the regions that will grow from the acquisition. For further information regarding our projections for EMN with Taminco, please refer to Effect of 2015 Acquisition of Taminco under Valuation Analysis.

New Innovations EMN has undergone dramatic change in the past 10 years, growing through acquisitions and restructuring changes. EMN will begin to realize organic growth through product line expansions and greater capacity utilization and expansion. EMN can begin to truly leverage the expertise of acquired companies and to develop a strong foothold in high-growth end markets.

Maturity 2020 2025 2044 Amount $800M $800M $400M Coupon 2.70% 3.80% 4.65%

Catalysts for Growth & Change

Commodity to Specialization EMN predicts Commodities to comprise 13% of earnings in 2014, which is a 4% decrease from 2010iii. Shifting focus from commodity products to specialties provides an opportunity for growth within EMN. As commodity products experience higher volatility, EMN can stabilize earnings through a more specialized approach. During 2008-2009 EMN earnings declined 40%, had EMN’s portfolio in 2008 reflected EMN today, the decline would have been only around 20%lvii. Emerging Markets EMN’s presence in emerging markets has increased over the past five years due to strategic acquisitions and joint ventures, most notably from Solutia. EMN will be the world’s largest supplier of hydrogenated carbon resins after the completion of its joint venture facility in China. China, while currently underperforming in growth compared to expectations, is still projected to grow at an annual rate of over 7.0% in the next two yearsxxxii. China’s growth over developed nations allows EMN to capitalize on China’s needs for construction and consumer durables. Growth in Construction The U.S. housing market is expected to grow by 8.0% in the next five yearsxxx. EMN is in a favorable position to capitalize on such growth through its leadership in chemicals used in paint and coating products in the AFP segment.

Investment Positives

• Acquiring Taminco will cause EMN to be less cyclical than it has been historically due to Taminco’s non-cyclical end markets for products

• Market has not fully accounted for EMN’s progression toward a specialty company and still views it as a primarily commodity company. EMN has developed less of a reliance on its commodity business and more of a focus on higher EBIT margin businesses

• Strategic acquisitions have given EMN a strong presence in high-growth emerging markets where EMN can use its innovative capabilities to deliver new products

• Diversified, mature company ahead of curve for industry players only recently switching to a specialty-focused business. EMN has been strategically changing its business from a commodity for past 10 years and has thus far been successful.

• Historic ability to repay debt early • Lower P/E than comparable firms • Pullback in stock price from Kingsport shutdown

makes it an ideal time to buy and realize expected returns

• Strong operating cash flows of $1.3 billion give EMN opportunities to invest in R&D, pay shareholders, and pay off debt

• Economies of scale

Investment Negatives • Derived demand mainly from manufacturing,

particularly in the U.S., makes EMN’s demand subject to changes in demand for industrial products. Europe is experiencing low inflation, making U.S. goods more expensive. This will negatively impact industrial production in the U.S.

• Last remaining facility on the U.S Gulf Coast to operate solely off of propane – higher cost of input negatively impacts COGS and earnings compared to competitors using lower cost inputs

• EMN is reliant on oil, natural gas, and feedstock prices for inputs. Futures for crude oil and natural gas are opposite of what is needed by EMN. The spread between the Henry Hub spot price and WTI crude is shrinking.

• Strict government regulations regarding environmental emissions. It is likely that there will be an increase in future costs to comply with stricter regulations. However, EMN’s commitment to being a leader in sustainable operations could potentially mitigates their overall risk to changing government regulations

• Disappointing outlook for China with growth expected to be under 8.0%

• Currently almost 50% of sales come from North America, namely U.S. giving EMN greater exposure to risks associated with U.S. economic wellbeing

• Expected increase in interest rates in coming years • Volatile housing market • Potential risk of not fulfilling acquisition of

Taminco • Increased leverage enhancing risk of EMN

Valuation Summary After extensive analysis of EMN, we have issued a BUY recommendation under the belief that the stock is currently undervalued. This recommendation is based on intrinsic value outcomes of the discounted cash flow (DCF) model, economic profit (EP) model, dividend discount model (DDM), relative valuation P/E ratio, and the P/E growth ratio. Our model estimates EMN’s stock price as of November 17, 2014. The DCF and EP yield identical intrinsic stock prices of $98.76. The DDM yields an intrinsic stock price of $71.27. The relative valuation gives a stock price between $103.54 and $117.99 based on the P/E ratio for 2014 and 2015, and

Investment Positives & Negatives

Valuation Summary

$83.82 and $95.10 based on the P/E growth ratio for 2014 and 2015. Key Assumptions Revenue Decomposition We began our valuation by making critical assumptions about the future growth of EMN. We projected revenues in EMN’s AFP, A&P, AM, Fibers, and SFI segments through 2019 based on our short and long-term economic assumptions, management guidance, and the impact of the Taminco acquisition. We forecasted six years of revenue under the assumption that EMN would reach steady long-term growth of 3.24% in the year 2019. We feel that 2019 is an appropriate year to end our forecast period because Taminco is the sole future acquisition in our forecast and after the acquisition EMN will focus on organic growth throughout the duration of our forecast period. By 2019, EMN will have reached stable growth slightly above GDP from organic growth, including adding capacity and expanding product lines. Due to the acquisition of Solutia, prior to 2012 EMN reported earnings in four segments, varying slightly from the current segments. Revenue by segment from 2010-2012 was retrospectively applied to reflect the company’s new reporting segments. In order to project future revenues, we relied heavily on forward looking guidance from management, overall economic outlook, future growth of the chemical industry, and historical revenues by segment from 2010-2013. EMN experienced unique growth from 2012-2013 due to the acquisition of Solutia. Revenue growth in these years were not indicative of future growth, therefore we utilized Q3 2014 revenues as a best predictor of the company going forward. We determined 2014 revenues represented a normalized growth that reflects the current product portfolio. To help determine revenues for FY 2014, we annualized EMN’s Q3 segment revenues. We then projected organic growth rates for our forecast period. We determined growth based on the following key assumptions surrounding each segment:

Segment Assumptions AFP • CAGR: 8.62% (4.6% without

acquisition) • Housing market in U.S. growth of

8.0% from 2014 to 2019 • Growth in automobile manufacturing

of 4.9% in U.S. through 2019 A&P • CAGR: 4.5%

• Expansion into China through joint venture that would make EMN largest supplier of hydrogenated carbon resins (used in products that absorb liquids)

AM • CAGR: 4.4% • Benefitting most from increased

R&D and EMN goal of 2/3 of new

products classified as sustainably advantageous

• Continue to grow as leader through gaining market share

Fibers • CAGR: 1.0% • Maintain steady growth after

completion of new Chinese acetate tow factory opens in 2014

• Smoking demand in China stays stable in midst of economic growth slowing through forecast horizon

SFI • CAGR: 8.54% (4.9% without acquisition)

• Growth consistent with industrial manufacturing output, which we expect to rise in short-term

• Continued expansion of capacity and use of R&D to introduce new products through 2019

2015 revenues were then adjusted to reflect the acquisitions of Taminco that is expected to close in May of 2015. See Effect of 2015 Acquisition of Taminco for details regarding assumptions made in the Taminco acquisition. By 2019, we expect EMN to reach a steady state growth rate of 3.24% reflecting predictions of overall economic growth at that time. EMN remains committed to growing revenues at a rate higher than GDP, therefore our CV growth rate reflects a slightly higher growth rate than our predictions of long term GDP growth of 3.0% xiv. We project the company to grow 4.80% in 2014 before 15.72% growth in 2015 due to the Taminco acquisition. After 2015, we project revenues at a slightly higher pre-acquisition level of 4.35% based on the assumption that inorganic growth from the acquisition will continue be realized in 2016. As the 2019 CV is approached, we presumed revenue growth would begin to reflect only organic growth. While EMN will continue to be dependent on the economic health of the world, with heavy influence from North America, revenue growth rates after 2016 will be less cyclical due to the non-cyclical behavior of Taminco’s business model. Critical Assumptions Cost of goods sold (COGS) is projected as a percentage of total revenue. EMN experienced higher profitability, and lower COGS in 2013 as a result of managerial efforts to enhance energy efficiency by 20% by 2020 and the realization of synergies from the Solutia acquisition. Based on more efficient operating strategies, lower oil prices, and expected product integrations and synergies from acquisitions we believe EMN will maintain a COGS lower than the historical five-year average of 72.0%. However, we believe COGS will increase from its 2013 historically low level of 65.0% due to increased propane costs and Taminco’s higher COGS level of 82.0%. Based on our assumptions, we project COGS to be 69.0% of total revenue.

Gross property, plant, & equipment (PP&E) was projected by management guidance of capital expenditures for 2014. We determined PP&E by projecting capital expenditures at EMN’s historical average of 6.50% of sales. We forecasted depreciation expense by calculating a historical average of 8.20% of gross PP&E. Depreciation expense was then added to accumulated depreciation. We then netted gross PP&E with accumulated depreciation. Amortization of intangible assets is forecasted at $79 million each year. This was determined by consulting management guidance surrounding the amortization of intangibles. We are assuming no further purchases of intangibles beyond 2015 due to management guidance stating that amortization of intangibles will be constant for the foreseeable future. Stock repurchases are forecasted using management guidance that $410 million in share repurchases will take place in 2014, followed by $1 billion in the following years. We estimate no share repurchases will take place in 2015 due to the need of cash for the acquisition. EMN will then repurchase a total of $1 billion worth of shares between 2016 and 2017. Effect of 2015 Acquisition of Taminco EMN is expected to complete the acquisition of Taminco in May 2015. Our base forecast was made absent of the acquisition. The following accounts were adjusted for the acquisition: Revenues We assume the acquisition will increase base forecast revenues by $1.4 billion. The incorporation of Taminco’s portfolio will be most impactful to AFP and SFI, with revenue increasing to a CAGR of 8.62% and 8.54%, respectively, over the forecast horizon. Accounting for both organic growth and additional revenue derived from Taminco, we project growth of 15.72% in 2015. Long-term Borrowings Long term borrowings increased by $2 billion, to reflect the debt needed to finance the transaction. Under the new capital structure, EMN will maintain a debt to non-cash assets ratio of 59.0%. This assumption of maintaining the 2015 capital structure is conservative given the uncertainties surrounding estimating the timing of the debt repayments. Noncash Assets As of September 30, 2014 Taminco’s noncash assets had a book value of $1.879 billion. We have incorporated each account balance with the respective EMN account. Any account on Taminco’s balance sheet without an equivalent EMN account has been aggregated into other current assets and other noncurrent assets. These accounts are not material in nature. We assume there will not be material changes in Taminco’s balance sheet accounts between September 30, 2014 and Q2 2015.

Goodwill Goodwill of $921 million is calculated as the difference between the $2.8 billion value of the acquisition and the $1.879 billion book value of Taminco’s assets as of September 30, 2014. The $921 million is an addition to EMN’s goodwill balance to arrive at an ending goodwill balance of $4.025 billion. Weighted Average Cost of Capital (WACC) WACC is calculated by assuming a capital structure of 62.1% equity and 37.9% debt. Cost of Equity Our calculation of EMN’s cost of equity involved the use of the Capital Asset Pricing Model (CAPM). We employed a risk-free rate of 3.06%, equal to the 30-year U.S Treasury bond yield as of November 17, 2014liv. We feel the current yield appropriately reflects the market’s future expectations for the long-term and is highly liquid due to its high trade volume. For the market risk premium, we use Damodaran’s implied ERP as of November 1, 2014 of 5.32%x. Finally, to determine the 1.67 value of Beta, we first averaged the daily and monthly raw Beta calculated for EMN by Bloomberg over the past two years. We only consider the past two years due to the acquisition of Solutia. We feel that the pre-acquisition years do not accurately reflect the company’s 2013 risk level. Next, we unlevered the beta using EMN’s 2013 debt to equity ratio of 0.37, based on the book values of debt and common stock. We then re-levered EMN’s beta by calculating the anticipated the 2014 year-end debt to equity ratio including the $2 billion debt issuance related to the Taminco acquisition. This resulted in a debt to equity ratio of 0.61. Based on these assumptions, EMN’s cost of equity is 11.94%. Cost of Debt In determining the cost of EMN’s debt it is critical to stay consistent with our long-term forecast horizon. Using Bloomberg, we identified the yields on EMN’s outstanding bond issuances with maturities near our 2019 CV. We then averaged the yields on 2024 bonds, resulting in a 3.96% pre-tax cost of debt. Using a marginal tax rate at 32.55%, EMN’s after-tax cost of debt is 2.67%. We believe this is an appropriate cost of debt based on EMN’s BBB credit ratinglvi. Discounted Cash Flow and Economic Profit Model After performing the DCF and EP model analysis, both models yielded an identical intrinsic stock price of $98.76. Based off of EMN’s current stock price as of November 17, 2014, we believe that EMN is undervalued by 15.0%. This premium is driven by EMN’s ability to generate high levels of operating and free cash flow from 2014-2019. The DCF model and EP model rely on the value drivers of net operating profit less adjusted taxes (NOPLAT) and invested capital (IC). The increase in free cash flow is driven by EMN’s revenue growth and ability to maintain its 2015 current cost structure.

We believe the intrinsic stock price determined by our DCF and EP model provides to most probable intrinsic stock price estimate. We believe EMN is currently undervalued because of a recent restructuring and acquisition costs. Additionally, EMN is experiencing a deflated price due to a low Q2 capacity utilization from the shutdown of a major plant. Moreover, EMN continues to move away from commodity products, allowing them to generate more stable returns. We believe the market does not fully reflect EMN’s shift to a more specialized product mix. Going forward, EMN will begin to realize organic returns from its strategic acquisitions of specialty chemical companies and product lines. The value drivers in the DCF and EP models appropriately reflect the future of EMN and therefore yield an intrinsic stock price higher than EMN’s current market price. Dividend Discount Model Our dividend discount model produced an intrinsic stock price of $71.27, indicating that EMN is currently overvalued in the market and trading 17.8% higher than its intrinsic value. This model relies heavily on our assumption that the dividend payout ratio (DPR) would stay constant at EMN’s historical average of 31.0% and EMN’s cash balance would continue to allow for cash dividends to be paid. Additionally, this model was impacted by the adjustment made to the beta in our WACC calculation in order to reflect the risk associated with the $2 billion debt issuance. As the beta increased, EMN’s cost of equity rose to 11.94%. Without the $2 billion debt issuance EMN’s cost of equity would have been 10.88%. As EMN’s cost of equity rose, the intrinsic stock price of the company decreased. The dividend discount model is not reflective of the true intrinsic value of EMN because it relies more on EMN’s cost of equity, and does not appropriately reflect EMN’s ability to create future value. Relative P/E and PEG Valuation To perform a relative valuation of EMN, we began by identifying chemical companies that have a product portfolio similar to EMN’s, which consists of a diverse product mix composed primarily of specialized chemicals. Additionally, we focused consideration on the comparable company’s market capitalization. Although DOW and DD are significantly larger than EMN by market capitalization, we feel it is important to include them in the relative valuation of EMN due to their leading positions in the chemical industry. The following companies, listed below with their respective market capitalization, were used in EMN’s relative valuation:

1. Ashland Inc. (ASH) $8.0B 2. Celanese Corporation (CE) $9.18B 3. Dupont (DD) $64.0B 4. Dow Chemical Company (DOW) $59.96B 5. Huntsman Corporation (HUN) $ 6.29B

EMN’s relative P/E ratio resulted in an implied stock price range of $103.54 to $117.99, while EMN’s PEG ratio analysis resulted in a stock price range of $83.82 to $95.10. We used 2014 and 2015 estimated EPS for each company,

and five-year estimated growth rates. We felt that the PEG ratio was a good valuation metric because EMN’s five- year estimated growth is comparable to similar companies in the industry. Over the forecast horizon, we predict that EMN will begin to primarily grow organically. As EMN reaches 2019, we believe its P/E ratio will increase slightly due to a heavier focus on R&D in creating new products and capacity additions at existing facilities. EMN’s relative valuation provides the highest stock price, at a 19.0% premium to its current stock price, solidifying our belief that EMN is currently undervalued. Sensitivity Analysis A sensitivity analysis simultaneously changes two variables used in the model to measure the effect that such change has on the intrinsic stock price. Our model includes six sensitivity tables, measuring change across the following scenarios: beta and risk free rate, COGS as a percent of sales and CV growth, equity risk premium and CV ROIC, cost of debt and tax rate, and WACC and CV growth. Beta & Risk Free Rate The calculation of EMN’s cost of equity was done using the CAPM. The risk free rate and beta are two of the main components of the CAPM. Changes to these variables can cause a significant change in the cost of equity. Differing values of beta and the risk free rate cause significant changes in EMN’s intrinsic value due to beta changing the volatility and risk of the company and the risk free rate changing the risk premium. Our calculation of EMN’s beta used in the forecast period involved un-levering and re-levering to account for our assumption that EMN’s capital structure would be heavily weighted toward debt during the forecast horizon. In the sensitivity analysis, we wanted to include EMN’s current capital structure beta of 1.47 to compare to the beta used in our forecast cost of equity of 1.67. The risk free rate used in EMN’s analysis is the current yield on the 30-year treasury, which changes with market expectations of risk. The treasury yield will respond accordingly to a change in the Federal Funds Rate, which we predict to increase by Q2 2015. Long-term, we predict the 10-year treasury to near 5.0%, which will also increase the 30-year treasury. COGS & CV Growth In this pair we looked at the COGS as a percent of sales (COGS/Sales) compared to the CV Growth. COGS/Sales has one of the greatest impacts on the intrinsic stock price of EMN. By increasing the COGS/Sales by just .05%, the intrinsic value of the stock decreases by approximately 5.4%, holding the CV growth rate constant. An increase in COGS reflects the impact that a shift in raw material costs can have on the overall profitability of the company. Within the next five years, EMN’s could experience a higher COGS for various reasons, however we see the following factors to be the most likely: • Higher operating costs due to inefficiencies with

Taminco acquisition • Increase in natural gas and propane volatility, impacting

profit margins due to EMN facilities on the U.S Gulf

Shore demanding propane as raw material that cannot be substituted

• OPEC cutting production, driving oil prices back up

In this sensitivity table we also looked at the CV growth rate used in our continuing value assumption. Since our CV growth rate is tied with GDP growth of the economy, we examined a bull and a bear case scenario. If the economy begins to slow in 2019 below our 3.0% prediction, EMN’s intrinsic value decreases. If the CV growth rate decreases the company will generate less revenues in the future, and thus will be less valuable. The stock price is less sensitive to the CV growth rate then it is to COGS/Sales, but is critical to examine both because the CV growth rate reflects the overall health of the economy and outlook for EMN. Equity Risk Premium & CV ROIC The next sensitivity table constructed compares at the equity risk premium applied in our WACC calculation and the CV ROIC. We employed the most recent equity risk premium calculated by Damodaran. The equity risk premium calculates the expected return on the market compared to the risk free rate. As the equity risk premium decreases, the intrinsic value of the stock increases. A decrease in the equity risk premium decreases EMN’s overall cost of equity, decreasing EMN’s WACC. With a lower WACC, future values are discounted at a lower rate giving the company more value. We wanted to capture a larger range to account for the variations surrounding the equity risk premium calculation. A less than 0.20% point movement in the equity risk premium produces a $4 shift in the intrinsic stock price. We also looked at the CV ROIC growth rate. The CV ROIC growth rate would move based on how much NOPLAT EMN is generating, as well as their invested capital levels. The more profitable EMN is, the higher their ROIC value will be (as long as they are operating at an ROIC level greater than their WACC). Profitability could be attributed to higher sales volumes or lower COGS. The higher ROIC the company can generate in the long run, the higher their valuation. The lowest ROIC EMN has generated in the past five years was 12.76%. It is important to monitor the equity risk premium as it relates to the WACC and ROIC, because if the WACC falls below ROIC, the company will begin to destroy value for any investments made. Cost of Debt & Tax Rate The WACC is calculated using the after-tax cost of debt, hence changes in the tax rate directly affect the cost of debt and the WACC. EMN’s lowest tax rate in the past 10 years was 24%, so a lower bound value of 25.35% replicates the impact that such a low rate would have on EMN’s price. The higher bound value of the cost of debt (4.65%) represents the rate on EMN’s latest bond issuance for 2044 bonds. Including this value in the analysis represents what would happen if the company were to become riskier by defaulting or taking on too much debt. This risk is slightly mitigated by accounting for the tax shield associated with debt. However, the riskier the firm, the higher its WACC. An observation from comparing the cost of debt and tax rate is that the higher

the tax rate and higher the cost of debt, the lower the price due to greater tax expense and risk. WACC & CV Growth The final sensitivity table compares WACC to the CV growth. The WACC is the rate used to discount FCF and EP to reach a present value. Due to the 2015 acquisition of Taminco and increased levels of debt, the WACC of EMN lowered as EMN moved to a capital structure of a higher D/E ratio. Since debt is a cheaper source of financing, the WACC decreased slightly. Prior to the debt issuance, EMN had a WACC of 8.74%. The current WACC of 8.43% reflects the change in capital structure, as well as the increased risk level reflected in a higher beta. As WACC increases, the intrinsic stock price of the company decreases. A 10 basis point movement in the WACC creates around a 3.0% movement in the intrinsic stock price. As discussed earlier, CV growth aligns closely with the overall growth of the economy. Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. 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 Krause Fund may hold a financial interest in the companies mentioned in this report. Sources iAshland Corporation. Ashland 2013 Annual Report. Ashland. 2014. Print. iiBBC. China’s Economy Shows More Signs of Weakness. BBC. 13 Nov. 2014. Web. <http://www.bbc.com/news/business-30032808 > iiiBegleiter, David, Ramanan Sivalingam, Jermaine Brown. Investor Day Delivers Now It’s Time to Deliver the Earnings. Deutsche Bank Market Research. 7 Nov. 2014. Print. ivBloomberg. GDP Economic Calendar. Bloomberg. 18 Oct. 2014. Web.< http://www.bloomberg.com/markets/economic-calendar/ > vBloomberg. Industrial Production Index Economic Calendar. Bloomberg. 16 Oct. 2014. Web. <http://www.bloomberg.com/markets/economic-calendar/ > viBoard of Governors of the Federal Reserve. Industrial Production and Capacity Utilization. 17 Nov. 2014. Web. <http://www.federalreserve.gov/releases/g17/current/default.htm > viiBoard of Governors of the Federal Reserve. Selected Daily Interest Rates. Federal Reserve Website. 14 Nov. 2014. Web. <http://www.federalreserve.gov/releases/h15/update/ >

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xxviFactSet. World Motor Vehicles. FactSet. 2014. Web. 20 Sept. 2014. xxviiFidelity. Materials Sector Overview. Fidelity. Web. <https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=learn&sector=15 > xxviiiFRED. St. Louis Federal Reserve. < http://research.stlouisfed.org/fred2/ > ixxxIBISWorld. Industrial Production Index. IBISWorld. Sept. 2014. Web. <http://clients1.ibisworld.com/reports/us/bed/default.aspx?entid=4098 > xxxIBISWorld. Yield on 10-year Treasury Note. IBISWorld. Sept. 2014. Web. < http://clients1.ibisworld.com/reports/us/bed/default.aspx?entid=97> xxxiInternational Council of Chemical Associations. Responsible Care. ICCA. Web. <http://www.icca-chem.org/en/Home/Responsible-care/ > xxxiiInternational Monetary Fund. World Economic Outlook: Legacies, Clouds, Uncertainties. International Monetary Fund. Oct. 2014. Print. xxxiiiMarketLine. Eastman Chemical Company. MarketLine. 26 Sept. 2014. Print. xxxivMarketWatch. Airgas Named Global Supplier of Excellence for 2013 by Eastman Chemical Company. 31 July 2013. Web. <http://www.marketwatch.com/story/airgas-named-global-supplier-of-excellence-for-2013-by-eastman-chemical-company-2014-07-31 > xxxvMergent, Inc. Eastman Chemical Company Overview. Mergent, Inc. 19 Sept. 2014. Print. xxxviMorningstar. Eastman Chemical Co. Ownership. Morningstar. Web. <http://investors.morningstar.com/ownership/shareholders-overview.html?t=EMN&region=usa&culture=en-US > xxxviiMSN Money. Eastman Chemical. MSN. Web. < http://www.msn.com/en-us/money/stockdetails/fi-126.1.EMN.NYS?symbol=EMN&form=PRFIHQ> xxxviiiMuir, Christopher. S&P Industry Surveys: Chemicals. S&P Capital IQ. May 2014. Print. ixlNC State News. NC State Signs Innovative Research Agreement with Eastman Chemical Company. NC State News. 10 Sept. 2012. Web. <http://news.ncsu.edu/2012/09/nc-state-signs-innovative-research-agreement-with-eastman-chemical-company/> xlNyitray, Brent. Consumer Sentiment Improves in September – Good News for Mall REITs. Market Realist. 15 Sept. 2014. Web. <http://marketrealist.com/2014/09/consumer-sentiment-improves-september-good-mall-reits/?utm_source=yahoo&utm_medium=feed&utm_content=graph-1&utm_campaign=consumer-sentiment-improves-september-good-mall-reits#101124> xliO’Reilly, Richard. S&P Industry Surveys: Specialty Chemicals. S&P Capital IQ. 2 Oct. 2003. Print. xliiReuters. Eastman Chemical to Buy Taminco for $1.8 Billion. Yahoo Finance. 11 Sept. 2014. Web..< http://finance.yahoo.com/news/eastman-chemical-acquire-taminco-corp-150251501.html > xliiiReuters. Low Oil Prices to Bite Into 2015 US Shale Growth. CNBC. 12 Nov. 2014. Web. <http://www.cnbc.com/id/102175914 >

xlivReuters. Oil in Worst Weekly Losing Streak in 28 Years. CNBC. 14 Nov. 2014. Web. <http://www.cnbc.com/id/102184284 > xlvRuiz, Brandon. Automobile and Engine Parts Manufacturing in the US. IBISWorld. July 2014. <http://clients1.ibisworld.com.proxy.lib.uiowa.edu/reports/us/industry/industryoutlook.aspx?entid=816 > xlviS&P Capital IQ. Eastman Chemical Company. McGraw Hill Financial. 8 Nov. 2014. Print. xlviiS&P Net Advantage. Eastman Chemical. 2014. Web. <http://www.netadvantage.standardandpoors.com.proxy.lib.uiowa.edu/NASApp/NetAdvantage/cp/companyFinancials.do > xlviiiSchwartz, Nelson, Clifford Krauss, Dionne Searcey. Sliding Oil and Gas Prices Give Americans More Money to Spend. The New York Times. 13 Nov. 2014. Web. <http://www.nytimes.com/2014/11/14/business/economy/lower-oil-prices-give-a-lift-to-the-american-economy.html?_r=1 > ilSeeking Alpha. Updated S&P Sector Weightings. Seeking Alpha. 17 July 2014. Web. <http://seekingalpha.com/article/2319245-updated-s-and-p-500-sector-weightings > lStynes, Tess. Eastman Chemical Profit Rises 11%. Wall Street Journal. 28 July 2014. Web. <http://online.wsj.com/articles/eastman-chemical-profit-rises-11-1496585028> liTaminco Corp. 2013 Annual Report. Taminco Corp. 2014. Print. liiThomsonONE. EMN Company Overview. ThomsonONE. 2014. Print. liiiTransparency Market Research. Specialty Chemicals Market. Transparency Market Research. 2014. Web. <http://www.transparencymarketresearch.com/specialty-chemicals-market.html> livU.S. Department of Treasury. Daily Treasury Yield Curve Rates. 17 Nov. 2014. Web. <http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield > lvU.S. Energy Information Administration. Short-Term Energy Outlook. EIA. Nov. 2014. Print. lviZacks Equity Research. Eastman Chemical Offering $2B Notes to Fund Taminco Buy. Zacks Equity Research. 11 Nov. 2014. Web. < http://www.zacks.com/stock/news/153735/eastman-chemical-offering-2b-notes-to-fund-taminco-buy> lviiZekauskas, Jeffrey, Ben Richardson, Silke Kueck, Youyou Yan. Eastman Chemical Company: Building a Base. J.P. Morgan. 3 Nov. 2014. Print. lviiiZhou, Morning. Crude Oil Falls to 4-Year Low as OPEC Seen as Resisting Cut. Bloomberg Businessweek. 13 Nov. 2014. Web. < http://www.businessweek.com/news/2014-11-13/brent-extends-drop-to-4-year-low-as-opec-seen-resisting > Figure 1: MSN Money Figure 2: Bloomberg Figure 3: IBISWorld Figure 4: NASDAQ Figure 5:U.S. Energy Information Association Figure 6:UBS Market Research Figure 7: St. Louis Federal Reserve Figure 8: Bloomberg Figure 9: U.S. Spindices Figure 10: SeekingAlpha

Figure 11: Statista Figure 12: Self-Generated, 2013 Annual Reports Figure 13: Self-Generated, Yahoo Finance Figure 14: Self-Generatd, Eastman Chemical 2013 Annual Report Figure 15:ThompsonOne Figure 16: Self-Generated, Eastman Chemical 2013 Annual Report Figure 17: Self-Generated, Eastman Chemical 2013 Annual Report Figure 18: Self-Generated, Eastman Chemical 2013 Annual Report Figure 19:Self-Generated, Eastman Chemical 2013 Annual Report. Figure 20: S&P Net Advantage Figure 21:Self-Generated, Zacks Figure 22: Deutsche Bank Market Research

Eastman Chemical (EMN)Key Assumptions of Valuation Model

Ticker Symbol EMNCurrent Share Price 83.95Fiscal Year End Dec. 31

Pre-Tax Cost of Debt 3.96%Beta 1.67Risk-Free Rate 3.06%Equity Risk-Premium 5.32%CV Growth of NOPLAT 7.94%Marginal Tax Rate 32.55%CV Growth Rate 3.24%CV ROIC 15.05%Number of shares 149.08WACC 8.43%CV ROE 21.08%

98.76$ 8.03% 8.13% 8.23% 8.33% 8.43% 8.53% 8.63% 8.73% 8.83%2.44% 100.25 97.42 94.70 92.06 89.52 87.06 84.68 82.37 80.142.64% 102.82 99.86 97.00 94.25 91.59 89.02 86.54 84.14 81.822.84% 105.59 102.48 99.48 96.59 93.81 91.12 88.53 86.03 83.613.04% 108.59 105.31 102.15 99.11 96.19 93.37 90.66 88.04 85.52

CV Growth 3.24% 111.84 108.36 105.03 101.83 98.76 95.80 92.95 90.21 87.563.44% 115.36 111.68 108.16 104.78 101.53 98.41 95.42 92.54 89.763.64% 119.21 115.30 111.55 107.97 104.54 101.24 98.08 95.05 92.133.84% 123.43 119.25 115.26 111.45 107.80 104.31 100.97 97.76 94.694.04% 128.07 123.59 119.32 115.25 111.37 107.66 104.11 100.71 97.46

WACC

98.76$ 1.47 1.52 1.57 1.62 1.67 1.72 1.77 1.82 1.871.06% 185.18 173.94 163.72 154.38 145.82 137.94 130.67 123.93 117.661.56% 164.90 155.46 146.81 138.86 131.51 124.71 118.39 112.51 107.022.06% 147.81 139.78 132.37 125.50 119.13 113.20 107.66 102.48 97.622.56% 133.23 126.30 119.87 113.89 108.30 103.08 98.19 93.59 89.26

Risk Free 3.06% 120.62 114.59 108.96 103.69 98.76 94.12 89.76 85.65 81.77Rate 3.56% 109.61 104.31 99.34 94.67 90.27 86.13 82.22 78.52 75.02

4.06% 99.92 95.21 90.79 86.62 82.68 78.96 75.43 72.08 68.904.56% 91.31 87.11 83.14 79.39 75.84 72.48 69.28 66.23 63.345.06% 83.61 79.83 76.26 72.87 69.65 66.59 63.68 60.90 58.24

Beta

98.76$ 66.50% 67.00% 67.50% 68.00% 68.50% 69.00% 69.50% 70.00% 70.50%2.44% 108.72 103.92 99.12 94.32 89.52 84.72 79.92 75.11 70.312.64% 111.30 106.37 101.44 96.52 91.59 86.66 81.73 76.81 71.882.84% 114.06 108.99 103.93 98.87 93.81 88.74 83.68 78.62 73.563.04% 117.02 111.81 106.61 101.40 96.19 90.98 85.77 80.57 75.36

CV Growth 3.24% 120.22 114.85 109.49 104.12 98.76 93.39 88.03 82.66 77.303.44% 123.67 118.13 112.60 107.06 101.53 96.00 90.46 84.93 79.403.64% 127.40 121.69 115.97 110.25 104.54 98.82 93.10 87.38 81.673.84% 131.47 125.55 119.63 113.72 107.80 101.89 95.97 90.05 84.144.04% 135.90 129.77 123.63 117.50 111.37 105.23 99.10 92.97 86.83

COGS/Sales

98.76$ 4.64% 4.81% 4.98% 5.15% 5.32% 5.49% 5.66% 5.83% 6.00%12.25% 113.15 107.00 101.30 95.98 91.03 86.39 82.04 77.96 74.1112.95% 115.82 109.55 103.74 98.32 93.27 88.55 84.12 79.96 76.0413.65% 118.21 111.84 105.92 100.42 95.29 90.49 85.99 81.76 77.7814.35% 120.36 113.90 107.90 102.32 97.11 92.24 87.67 83.38 79.34

CV ROIC 15.05% 122.32 115.77 109.69 104.04 98.76 93.82 89.20 84.85 80.7615.75% 124.10 117.47 111.32 105.60 100.26 95.27 90.59 86.19 82.0516.45% 125.73 119.03 112.82 107.03 101.64 96.59 91.86 87.42 83.2317.15% 127.23 120.47 114.19 108.35 102.90 97.80 93.03 88.54 84.3217.85% 128.61 121.79 115.45 109.56 104.06 98.92 94.10 89.58 85.32

Equity Risk Premium98.76$ 3.60% 3.69% 3.78% 3.87% 3.96% 4.05% 4.25% 4.45% 4.65%

25.35% 115.26 114.36 113.47 112.59 111.72 110.86 108.97 107.12 105.3127.15% 111.88 111.03 110.19 109.36 108.53 107.72 105.93 104.18 102.4628.95% 108.46 107.66 106.87 106.09 105.31 104.54 102.85 101.20 99.5830.75% 105.01 104.26 103.52 102.78 102.05 101.33 99.74 98.19 96.67

Tax Rate 32.55% 101.53 100.83 100.13 99.44 98.76 98.08 96.60 95.14 93.7134.35% 98.01 97.35 96.71 96.06 95.43 94.80 93.41 92.06 90.7236.15% 94.45 93.84 93.24 92.65 92.06 91.47 90.19 88.93 87.6937.95% 90.85 90.30 89.74 89.20 88.65 88.11 86.93 85.77 84.6339.75% 87.22 86.71 86.20 85.70 85.21 84.71 83.63 82.57 81.52

Cost of Debt

Eastman Chemical (EMN)Revenue Decomposition

(in millions, except share amounts)Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019Sales Revenue by Segment

Additives & Functional Products 1,067 1,332 1,719 1,822 2,332 2,449 2,547 2,649 2,755 Adhesives & Plasticizers 1,381 1,432 1,326 1,406 1,504 1,564 1,624 1,672 1,722 Advanced Materials 1,195 1,694 2,349 2,473 2,597 2,727 2,850 2,964 3,067 Fibers 1,279 1,315 1,441 1,445 1,459 1,474 1,488 1,503 1,518 Specialty Fluids & Intermediates 2,256 2,318 2,497 2,634 3,425 3,596 3,704 3,833 3,968 Total Revenue 7,178 8,091 9,332 9,780 11,317 11,810 12,212 12,621 13,030

10,947 Growth Rates 0.28

Additives & Functional Products 14.61% 24.84% 29.05% 6.00% 28.00% 5.00% 4.00% 4.00% 4.00%Adhesives & Plasticizers 31.52% 3.69% -7.40% 6.00% 7.00% 4.00% 3.80% 3.00% 3.00%Advanced Materials 14.57% 41.76% 38.67% 5.30% 5.00% 5.00% 4.50% 4.00% 3.50%Fibers 12.00% 2.81% 9.58% 0.25% 1.00% 1.00% 1.00% 1.00% 1.00%Specialty Fluids & Intermediates 34.61% 2.75% 7.72% 5.50% 30.00% 5.00% 3.00% 3.50% 3.50%Percent changes in Total Revenue 22.87% 12.72% 15.34% 4.80% 15.72% 4.35% 3.41% 3.35% 3.24%

Eastman Chemical (EMN)Income Statement

(in millions, except share amounts)Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019Sales 7,178 8,064 9,358 9,780 11,317 11,810 12,212 12,621 13,030 Cost of Goods Sold (COGS) 5,277 5,959 6,114 6,699 7,752 8,090 8,365 8,646 8,926 Amortization 50 129 79 79 79 79 79 79 Depreciation Expense 261 309 345 352 373 451 480 508 536 Gross Income 1,640 1,746 2,770 2,649 3,113 3,190 3,288 3,388 3,489 SG&A Expense 623 798 802 831 951 968 1,001 1,035 1,068 EBIT (Operating Income) 1,017 948 1,968 1,818 2,163 2,221 2,286 2,353 2,421 Nonoperating Income - Net 40 26 (3) - - - - - - Interest Expense 84 166 178 168 103 271 279 363 365 Unusual Expense - Net 9 159 108 77 - - - - - Pretax Income 964 649 1,679 1,573 2,060 1,950 2,008 1,990 2,055 Income Taxes 307 206 507 512 671 635 654 648 669 Consolidated Net Income 657 443 1,172 1,061 1,389 1,315 1,354 1,342 1,386 Minority Interest - 7 7 Net Income 657 436 1,165 1,061 1,389 1,315 1,354 1,342 1,386

Eastman Chemical (EMN)Balance Sheet

(in millions, except share amounts)Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019AssetsCurrent Assets

Cash & cash equivalents 577 249 237 3,215 1,440 3,573 4,629 4,560 4,290 Short term time deposits 200 - - - - - - - - Trade receivables, net 632 846 880 978 1,219 1,181 1,221 1,262 1,303 Miscellaneous receivables 72 151 208 181 209 218 226 233 241 Inventories 779 1,260 1,264 1,304 1,652 1,574 1,628 1,682 1,737 Other current assets 42 193 251 245 297 295 305 316 326

Total current assets 2,302 2,699 2,840 5,922 4,816 6,842 8,009 8,054 7,897 Properties

Properties & equipment at cost 8,383 9,681 9,958 10,558 11,891 12,691 13,516 14,366 15,241 Less: accumulated depreciation 5,276 5,500 5,668 6,020 6,393 6,844 7,324 7,833 8,369

Net properties 3,107 4,181 4,290 4,538 5,498 5,847 6,192 6,533 6,872 Goodwill 406 2,644 2,637 2,637 4,025 4,025 4,025 4,025 4,025 Intangible assets, net of accumulated amortization - 1,849 1,761 1,682 2,101 2,022 1,943 1,864 1,785 Other noncurrent assets 369 337 317 367 545 478 495 511 528

Total assets 6,184 11,710 11,845 15,145 16,986 19,214 20,663 20,987 21,107

Liabilities and Stockholders' EquityCurrent liabilities

Payables & other current liabilities 961 1,360 1,470 1,535 1,777 1,854 1,832 1,893 1,955 Borrowings due within one year 153 4 - 616 854 458 1382 952 250

Total current liabilities 1,114 1,364 1,470 2,151 2,631 2,312 3,214 2,845 2,205 Long-term borrowings 1,445 4,779 4,254 6,849 7,039 9,172 9,228 9,460 9,692 Deferred income tax liabilities 210 182 496 434 569 539 555 550 568 Post employment obligations 1,411 1,856 1,297 1,297 1,297 1,297 1,297 1,297 1,297 Other long term liabilities 134 501 453 391 453 472 488 505 521

Total liabilities 4,314 8,682 7,970 11,123 11,989 13,792 14,782 14,657 14,282 Stockholders' equityCommon stock 902 1,711 1,780 1,805 1,821 1,838 1,863 1,886 1,923

Retained earnings (accumulated deficit) 3,436 3,038 4,012 4,542 5,501 6,409 7,343 8,269 9,226 Accumulated other comprehensive income (loss) 538 123 171 173 173 173 173 173 173

Total stockholders' equity before treasury stock 3,800 4,872 5,963 6,520 7,495 8,419 9,379 10,328 11,322 Less: treasury stock at cost 1,930 1,929 2,167 2,577 2,577 3,077 3,577 4,077 4,577

Total Eastman Chemical Co. stockholders' equity 1,870 2,943 3,796 3,943 4,918 5,342 5,802 6,251 6,745 Noncontrolling interest - 85 79 79 79 79 79 79 79 Total equity 1,870 3,028 3,875 4,022 4,997 5,421 5,881 6,330 6,824 Total liabilities and stockholders' equity 6,184 11,710 11,845 15,145 16,986 19,214 20,663 20,987 21,107

Eastman Chemical (EMN)Cash Flow Statement

(in millions, except share amounts)Fiscal Years Ending Dec. 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Operating ActivitiesNet Income / Starting Line 170 557 409 300 346 136 438 696 444 1,172 Depreciation, Depletion & Amortization 322 304 308 327 267 274 280 273 360 433 Deferred Taxes & Investment Tax Credit (136) 115 7 (9) (71) 185 59 11 48 331 Other Funds 132 (115) (12) 130 (13) 179 123 (70) 222 (355) Funds from Operations 488 861 712 748 529 774 900 910 1,074 1,581 Changes in Working Capital 6 (92) (103) (16) 124 (16) (325) (285) 54 (284) Net Operating Cash Flow 494 769 609 732 653 758 575 625 1,128 1,297

Investing ActivitiesCapital Expenditures (262) (354) (405) (529) (644) (318) (250) (466) (470) (488) Sale of Fixed Assets & Businesses 127 50 322 202 337 30 13 651 7 31 Purchase/Sale of Investments - 417 - (40) (6) (68) (190) (356) (2,469) - Other Funds (13) (131) (11) 32 (63) (13) (15) 29 (30) - Net Investing Cash Flow (148) (18) (94) (335) (376) (369) (442) (142) (2,962) (457)

Financing ActivitiesCash Dividends Paid (137) (142) (144) (147) (135) (128) (127) (136) (192) (140) Change in Capital Stock 77 100 93 (279) (462) (4) (162) (286) 56 (179) Issuance/Reduction of Debt, Net (519) (505) (50) (22) (182) 150 (122) (1) 1,644 (530) Other Funds - - - - - - - - (4) (10) Net Financing Cash Flow (579) (547) (101) (448) (779) 18 (411) (423) 1,504 (859) Exchange Rate Effect - (5) 1 - 1 (1) 1 1 2 7 Net Change in Cash (233) 199 415 (51) (501) 406 (277) 61 (328) (12)

Eastman Chemical (EMN)Cash Flow Statement

(in millions, except share amounts)Fiscal Years Ending Dec. 31 2014E 2015E 2016E 2017E 2018E CV 2019Operating ActivitiesNet Income 1,061 1,389 1,315 1,354 1,342 1,386 Add: Depreciation 352 373 451 480 508 536 Add: Amortization 79 79 79 79 79 79 Increase (decrease) in deferred income tax liabilities (62) 135 (30) 16 (5) 18 Changes in Working Capital:

Increase in trade receivables 98 241 (38) 40 41 41 Increase in miscellaneous receivables (27) 28 9 7 8 8 Increase in inventories 40 348 (77) 54 55 55 Increase in other current assets (6) 52 (2) 10 10 10 Increase in payables & other current liabilities 65 241 77 (22) 61 61 Changes in Working Capital (39) (428) 185 (134) (52) (52)

Net Cash Provided by Operating Activities 1,392 1,547 2,000 1,795 1,873 1,968

Investing Activities(Increase) decrease in short term investmentsCapital expenditures (600) (1,333) (800) (825) (850) (875) Business acquisitions (change in goodwill) - (1,388) - - - - Capitalization of intangible assets (change in intangibles) - (498) - - - - Current liabilities related to assets held for sale - - - - - - Increase (decrease) in other LT liabilities (62) 61 20 16 16 16 (Increase) decrease in other assets (50) (179) 67 (16) (17) (17) Net Investing Cash Flow (712) (3,336) (713) (825) (850) (875)

Financing ActivitiesChanges in current portion LT debt 616 238 (396) 924 (430) (702) Change in LT borrowings 2,595 190 2,133 56 232 232 Dividends paid (530) (431) (408) (420) (416) (430) Common stock issuance 25 16 16 25 23 38 Accumulated other income (loss) 2 - - - - - Repurchases of stock (410) - (500) (500) (500) (500) Net Financing Cash Flow 2,297 14 846 86 (1,091) (1,363)

Net Change in Cash 2,978 (1,775) 2,133 1,056 (68) (270) Cash & cash equivalents at beginning of period 237 3,215 1,440 3,573 4,629 4,560 Cash & cash equivalents at end of period 3,215 1,440 3,573 4,629 4,560 4,290

Eastman Chemical (EMN)Common Size Income Statement

Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Goods Sold (COGS) incl. Amortization 73.52% 73.90% 65.33% 68.50% 68.50% 68.50% 68.50% 68.50% 68.50%Depreciation Expense 3.64% 3.83% 3.69% 3.60% 3.29% 3.82% 3.93% 4.03% 4.12%Gross Income 22.85% 21.65% 29.60% 27.09% 27.51% 27.01% 26.92% 26.85% 26.78%SG&A Expense 8.68% 9.90% 8.57% 8.50% 8.40% 8.20% 8.20% 8.20% 8.20%EBIT (Operating Income) 14.17% 11.76% 21.03% 18.59% 19.11% 18.81% 18.72% 18.65% 18.58%Nonoperating Income - Net 0.56% 0.32% -0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Interest Expense 1.17% 2.06% 1.90% 1.72% 0.91% 2.30% 2.28% 2.88% 2.80%Unusual Expense - Net 0.13% 1.97% 1.15% 0.79% 0.00% 0.00% 0.00% 0.00% 0.00%Pretax Income 13.43% 8.05% 17.94% 16.08% 18.20% 16.51% 16.44% 15.77% 15.77%Income Taxes 4.28% 2.55% 5.42% 5.23% 5.93% 5.38% 5.35% 5.13% 5.13%Consolidated Net Income 9.15% 5.49% 12.52% 10.85% 12.28% 11.14% 11.09% 10.64% 10.64%Minority Interest 0.00% 0.09% 0.07% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net Income 9.15% 5.41% 12.45% 10.85% 12.28% 11.14% 11.09% 10.64% 10.64%

Eastman Chemical (EMN)Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019AssetsCurrent Assets

Cash & cash equivalents 8.04% 3.09% 2.53% 32.87% 12.72% 30.25% 37.90% 36.13% 32.92%Short term time deposits 2.79% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Trade receivables, net 8.80% 10.49% 9.40% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%Miscellaneous receivables 1.00% 1.87% 2.22% 1.85% 1.85% 1.85% 1.85% 1.85% 1.85%Inventories 10.85% 15.63% 13.51% 13.33% 13.33% 13.33% 13.33% 13.33% 13.33%Other current assets 0.59% 2.39% 2.68% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%

Total current assets 32.07% 33.47% 30.35% 60.55% 42.56% 57.93% 65.58% 63.81% 60.60%Properties

Properties & equipment at cost 116.79% 120.05% 106.41% 107.95% 105.07% 107.46% 110.68% 113.82% 116.96%Less: accumulated depreciation 73.50% 68.20% 60.57% 61.56% 56.49% 57.96% 59.98% 62.06% 64.23%

Net properties 43.29% 51.85% 45.84% 46.40% 48.58% 49.51% 50.70% 51.76% 52.74%Goodwill 5.66% 32.79% 28.18% 26.96% 35.57% 34.08% 32.96% 31.89% 30.89%Intangible assets, net of accumulated amortization 0.00% 22.93% 18.82% 17.20% 18.56% 17.12% 15.91% 14.77% 13.70%Other noncurrent assets 5.14% 4.18% 3.39% 3.75% 4.05% 4.05% 4.05% 4.05% 4.05%

Total assets 86.15% 145.21% 126.58% 154.86% 150.09% 162.69% 169.20% 166.28% 161.98%

Liabilities and Stockholders' EquityCurrent liabilities

Payables & other current liabilities 13.39% 16.87% 15.71% 15.70% 15.70% 15.70% 15.00% 15.00% 15.00%Borrowings due within one year 2.13% 0.05% 0.00% 6.30% 7.55% 3.88% 11.32% 7.54% 1.92%

Total current liabilities 15.52% 16.91% 15.71% 22.00% 23.25% 19.58% 26.32% 22.54% 16.92%Long-term borrowings 20.13% 59.26% 45.46% 70.03% 62.20% 77.67% 75.56% 74.96% 74.38%Deferred income tax liabilities 2.93% 2.26% 5.30% 4.44% 5.03% 4.56% 4.54% 4.36% 4.36%Post-employment obligations 19.66% 23.02% 13.86% 13.26% 11.46% 10.98% 10.62% 10.28% 9.95%Other long-term liabilities 1.87% 6.21% 4.84% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

Total liabilities 60.10% 107.66% 85.17% 113.73% 105.93% 116.79% 121.04% 116.13% 109.61%Stockholders' equityCommon stock 12.57% 21.22% 19.02% 18.46% 16.09% 15.56% 15.25% 14.94% 14.76%

Retained earnings (accumulated deficit) 47.87% 37.67% 42.87% 46.45% 48.61% 54.27% 60.13% 65.52% 70.80%Accumulated other comprehensive income (loss) 7.50% 1.53% 1.83% 1.77% 1.53% 1.46% 1.42% 1.37% 1.33%

Total stockholders' equity before treasury stock 52.94% 60.42% 63.72% 66.67% 66.23% 71.29% 76.80% 81.83% 86.89%Less: treasury stock at cost 26.89% 23.92% 23.16% 26.35% 22.77% 26.06% 29.29% 32.30% 35.13%

Total Eastman Chemical Co. stockholders' equity 26.05% 36.50% 40.56% 40.32% 43.46% 45.24% 47.51% 49.53% 51.76%Noncontrolling interest 0.00% 1.05% 0.84% 0.81% 0.70% 0.67% 0.65% 0.63% 0.61%Total equity 26.05% 37.55% 41.41% 41.13% 44.16% 45.90% 48.16% 50.15% 52.37%Total liabilities and stockholders' equity 86.15% 145.21% 126.58% 154.86% 150.09% 162.69% 169.20% 166.28% 161.98%

Eastman Chemical (EMN)Key Ratios

Fiscal Years Ending Dec. 31 Formula 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019

Liquidity ratiosCurrent ratio Current assets/Current liabilities 2.07 1.98 1.93 2.75 1.83 2.96 2.49 2.83 3.58Quick ratio (Cash and cash equivalents + A/R + Other receivables)/CL 1.15 0.91 0.90 2.03 1.09 2.15 1.89 2.13 2.65Cash ratio Cash and cash equivalents/Current liabilities 0.52 0.18 0.16 1.49 0.55 1.55 1.44 1.60 1.95

Asset management ratiosFixed asset turnover Revenue/ PPE, net 2.31 1.93 2.18 2.16 2.06 2.02 1.97 1.93 1.90Receivable turnover Revenue/ Average accounts receivable 12.20 10.91 10.84 10.53 10.30 9.84 10.17 10.16 10.16Inventory turnover Revenue/ Inventory 9.21 6.40 7.40 7.50 6.85 7.50 7.50 7.50 7.50

Leverage ratiosDebt ratio Total debt/Total assets 0.26 0.41 0.36 0.49 0.46 0.50 0.51 0.50 0.47Debt to equity Total debt/Total equity 0.85 1.58 1.10 1.86 1.58 1.78 1.80 1.64 1.46Interest Coverage Ratio EBIT/Interest expense 12.11 5.71 11.06 10.80 21.06 8.19 8.21 6.48 6.63

Profitability ratiosOperating margin Income from operations/Revenue 14.17% 11.76% 21.03% 18.59% 19.11% 18.81% 18.72% 18.65% 18.58%Profit margin Net income/Revenue 9.15% 5.41% 12.45% 10.85% 12.28% 11.14% 11.09% 10.64% 10.64%ROE Net income/Average total equity 37.58% 17.80% 33.75% 26.86% 30.81% 25.25% 23.96% 21.99% 21.08%ROA Net income/Average total assets 10.80% 4.87% 9.89% 7.86% 8.65% 7.27% 6.79% 6.45% 6.59%

Payout RatiosPayout Ratio DPS/EPS 21.34% 29.43% 15.76% 50.00% 31.00% 31.00% 31.00% 31.00% 31.00%

Eastman Chemical (EMN)Value Driver Estimation

(in millions, except share amounts)

Fiscal Years Ending 2011 2012 2013 2014E 2015E 2016E 2017E 2018E CV 2019

NOPLATSales 7178 8064 9358 9,780 11,317 11,810 12,212 12,621 13,030 Cost of Goods Sold 5277 5959 6114 6,699 7,752 8,090 8,365 8,646 8,926 Amortization - 50.00 129.00 79 79 79 79 79 79 Depreciation 261 309 345 352 373 451 480 508 536 SG&A 623 798 802 831 951 968 1,001 1,035 1,068 EBIT (Operating Income) 1,017 948 1,968 1,818 2,163 2,221 2,286 2,353 2,421 Add: Implied interest on operating leases 3 7 7 7 9 9 10 11 11 EBITA 1,020 955 1,975 1,825 2,172 2,231 2,296 2,364 2,432

Less: Adjusted TaxesProvision for income taxes 307 206 507 512 671 635 654 648 669 Less: Tax on nonoperating income 12 9 (1) - - - - - - Add: Tax shield on interest expense 25 57 60 55 33 88 91 118 119 Add: Tax shield on unusual expense 3 54 36 25 - - - - - Add: Tax shield on lease 1 2 2 25 3 3 3 3 4 Total Adjusted Taxes 324 311 606 617 707 726 748 770 792

Plus: Change in deferred taxes (22) 48 331 (62) 135 (30) 16 (5) 18 NOPLAT 675 692 1,700 1,147 1,599 1,474 1,565 1,590 1,658

Invested Capital

Operating Current AssetsNormal Cash 560 249 237 763 883 921 953 984 1016A/R 632 846 880 978 1,219 1,181 1,221 1,262 1,303 Inventory 779 1,260 1,264 1,304 1,652 1,574 1,628 1,682 1,737 Other Assets 42 193 251 245 297 295 305 316 326

Operating Current Assets 2,013 2,548 2,632 3,289 4,050 3,972 4,107 4,245 4,382

Non Interest Bearing CLA/P & Accrued 961 1,360 1,470 1,535 1,777 1,854 1,832 1,893 1,955

Operating Current Liabilities 961 1,360 1,470 1,535 1,777 1,854 1,832 1,893 1,955

Net Operating Working Capital 1,052 1,188 1,162 1,754 2,273 2,117 2,275 2,351 2,428

Plus: Net PPE 3,107 4,181 4,290 4,538 5,498 5,847 6,192 6,533 6,872

Net Intangible Assets 101 1,849 1,761 1,682 2,101 2,022 1,943 1,864 1,785 PV of Operating Leases 86 171 175 185 224 238 252 266 280 Plus: Net Other Operating Assets 187 2,020 1,936 1,867 2,325 2,260 2,195 2,130 2,065

Invested Capital 4,346 7,389 7,388 8,158 10,096 10,224 10,662 11,014 11,364

NOPLAT 675 692 1,700 1,147 1,599 1,474 1,565 1,590 1,658 /Beg. Invested Capital 4,009 4,346 7,389 7,388 8,158 10,096 10,224 10,662 11,014 ROIC 16.83% 15.93% 23.00% 15.53% 19.60% 14.60% 15.30% 14.91% 15.05%

Beg. Invested Capital 4,009 4,346 7,389 7,388 8,158 10,096 10,224 10,662 11,014 *(ROIC-WACC) 8.40% 7.50% 14.58% 7.10% 11.17% 6.17% 6.88% 6.48% 6.62% EP 336.62 325.83 1,077.02 524.34 911.58 623.14 702.99 690.91 729.70

NOPLAT 675 692 1,700 1,147 1,599 1,474 1,565 1,590 1,658 Minus: Change in invested capital 338 3,043 (2) 770 1,938 128 438 353 350 FCF 337 (2,351) 1,702 377 (339) 1,346 1,127 1,237 1,309

Eastman Chemical (EMN)Weighted Average Cost of Capital (WACC) Estimation

WACCRisk Free Rate 3.06%Equity Risk Premium 5.32%Beta 1.67 Beta AssumptionsCost of Equity 11.94% Beta Levered 1.47

Marginal Tax Rate 32.55%Pre-Tax Cost of Debt 3.96% 2013 D/E 0.37Marginal Tax rate 32.55% Beta Unlevered 1.18Cost of Debt 2.67% New D/E 0.61

Beta Relevered 1.67Market Value of Equity 12,515 Market Value of Debt 7,639

Market Value of the Firm 20,155

Weights of Equity 62.10%Weights of Debt 37.90%

WACC 8.43%

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

(in millions, except share amounts)Key Inputs: CV Growth 3.24% CV ROIC 15.05% WACC 8.43% Cost of Equity 11.94%

DCF ModelFiscal Years Ending Dec. 31 2013 2014E 2015E 2016E 2017E 2018E CV 2019FCF $ 377 $ (339) $ 1,346 $ 1,127 $ 1,237 $ 1,309 Continuing Value (CV) $ 25,080

WACC 8.43%CF to discount 377$ (339)$ 1,346$ 1,127$ 1,237$ 25,080$ Periods to discount 1 2 3 4 5 5 Present Value of Cash Flows 347$ (288)$ 1,056$ 815$ 825$ 16,734$

Value of operating assets 19,490$ Add: misc receivables 208 Add: other noncurrent assets 317 Less: long term debt 4254Less: PV operating leases 175Less: post retirement liabilities 1297Less: employee stock options 43Less: noncontrolling interest 79Less: environmental reserves 368Value of Equity 13,799$ Number of shares outstanding 149.08Intrinsic value of stock 92.56$

Fraction of the year elapsed 0.833Adjusted Stock Price (as of 11/17/2014) 98.76$

EP ModelFiscal Years Ending Dec. 31 2013 2014E 2015E 2016E 2017E 2018E CV 2019Beginning Invested Capital $ 7,388 Economic Profit 524$ 912$ 623$ 703$ 691$ 730$ Continuing Value (CV) 14,065$

WACC 8.43%EP to Discount 524$ 912$ 623$ 703$ 691$ 14,065$ Number of Periods 1 2 3 4 5 5 Present Value of Economic Profit 484$ 775$ 489$ 509$ 461$ 9,385$

PV of EP 12,102$

Value of operating assets 19,490$ Add: misc receivables 208 Add: other noncurrent assets 317 Less: long term debt 4,254 Less: PV operating leases 175 Less: post retirement liabilities 1,297 Less: employee stock options 43 Less: noncontrolling interest 79 Less: environmental reserves 368 Value of Equity 13,799$ Shares Outstanding 149.08Intrinsic Value of Stock 92.56$

Fraction of the year elapsed 0.833Adjusted Stock Price (as of 11/17/2014) 98.76$

Eastman Chemical (EMN)Dividend Discount Model (DDM)

Fiscal Years Ending Dec. 31 2013 2014E 2015E 2016E 2017E 2018E CV 2019

EPS 7.14$ 9.33$ 9.08$ 9.59$ 9.70$ 10.20$

Key Assumptions CV growth 3.24% CV ROE 21.08% Cost of Equity 11.94%

CV payout ratio 31.00%

Future Cash Flows P/E Multiple 9.72 EPS(next period) 10.20 Future Stock Price 99.21$ Dividends Per Share 3.57$ 2.89$ 2.81$ 2.97$ 3.01$ 99.21$

Number of periods 1 2 3 4 5 5

Discounted Cash Flows 3.19$ 2.31$ 2.01$ 1.89$ 1.71$ 56.43$

Intrinsic Value 67.54$ Fraction of year elapsed 0.833

Adjusted Stock Price (as of 11/17/2014) 71.27$

Eastman Chemical (EMN)Relative Valuation Models

EPS EPS Est.Ticker Company Price 2014E 2015E P/E 14 P/E 15 5yr Gr. PEG 14 PEG 15CE CELANESE CORPORATION 59.77$ $5.58 $5.61 10.7 10.7 8.86 1.21 1.20 DOW DOW CHEMICAL COMPANY 51.12$ $2.95 $3.44 17.3 14.9 11.33 1.53 1.31 DD E.I. DUPONT DE NEMOURS 70.47$ $4.01 $4.51 17.6 15.6 8.46 2.08 1.85 ASH ASHLAND Inc 109.11$ $7.46 $8.58 14.6 12.7 10.69 1.37 1.19 HUN HUNTSMAN CORPORATION 25.73$ $2.10 $2.74 12.3 9.4 7.00 1.75 1.34

Average 14.5 12.6 1.6 1.4

EMN EASTMAN CHEMICAL COMPANY 83.95$ 7.14 9.33 11.75 9.00 7.40 1.59 1.22

Implied Value: Relative P/E (EPS14) $ 103.54 Relative P/E (EPS15) 117.99$ PEG Ratio (EPS14) 83.82$ PEG Ratio (EPS15) 95.10$

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 2,359,100Average Time to Maturity (years): 5.98Expected Annual Number of Options Exercise 394,364

Current Average Strike Price: 38.73$ Cost of Equity: 11.94%Current Stock Price: 83.95$

2014E 2015E 2016E 2017E 2018E CV 2019Increase in Shares Outstanding: 419,964 419,964 657,364 584,064 970,664 874,864Average Strike Price: 38.73$ 38.73$ 38.73$ 38.73$ 38.73$ 38.73$ Increase in Common Stock Account: 16,263,186 16,263,186 25,456,557 22,617,997 37,589,173 33,879,295 (Assumes common stock and additional paid in capital are combined into one account).

16.26 25.46 22.62 37.59 33.88 Change in Treasury Stock 410,000,000 0 500,000,000 500,000,000 500,000,000 500,000,000Expected Price of Repurchased Shares: 83.95$ 93.98$ 105.20$ 117.77$ 131.83$ 147.58$ Number of Shares Repurchased: 4,883,859 - 4,752,745 4,245,630 3,792,624 3,387,953

Shares Outstanding (beginning of the year) 153,000,000 148,536,104 148,956,068 144,860,686 141,199,119 138,377,158Plus: Shares Issued Through ESOP 419,964 419,964 657,364 584,064 970,664 874,864Less: Shares Repurchased in Treasury 4,883,859 - 4,752,745 4,245,630 3,792,624 3,387,953 Shares Outstanding (end of the year) 148,536,104 148,956,068 144,860,686 141,199,119 138,377,158 135,864,068

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol EMNCurrent Stock Price 83.95 Risk Free Rate 3.06%Current Dividend Yield 1.70%Annualized St. Dev. of Stock Returns 20.90%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 51,200 21.00 2.10 61.31$ 3,139,219$ Range 2 576,300 28.00 4.60 53.34$ 30,740,189$ Range 3 263,000 31.00 3.00 51.51$ 13,545,905$ Range 4 189,700 33.00 3.80 49.37$ 9,365,555$ Range 5 961,000 39.00 7.20 43.69$ 41,986,062$ Range 6 317,900 70.00 9.20 26.69$ 8,484,498$

Total 2,359,100 38.73$ 5.98 51.97$ 107,261,429$