Morgan Stanley maintains Eastman stock with $115 target

Eastman Chemical (EMN) faces a setback with the loss of a $375 million Department of Energy grant for its Longview, Texas molecular recycling facility, though the company intends to proceed with a potentially scaled-down version of the project; Morgan Stanley maintains an Overweight rating with a $115 price target. Despite increased capital expenditures and decreased demand, Eastman is expected to supply PepsiCo (PEP) with recycled PET from either the Longview or Kingsport facility, fulfilling their take/pay contract. Separately, PepsiCo reported a slight EPS miss in Q1 2025 but beat revenue expectations, while Evercore ISI lowered its price target to $140, citing challenges in the Frito-Lay North America segment.

Analysis

Eastman Chemical (EMN) confronts a notable challenge with the confirmed loss of a $375 million Department of Energy grant for its Longview, Texas molecular recycling facility, a decision Stifel analysts view as having a low probability of reversal. Despite this setback, which places the grant on the "cancel" list, Morgan Stanley reiterated an Overweight rating on EMN with a $115.00 price target. Eastman is expected to proceed with the Longview project, originally planned before any government funding considerations, albeit potentially with a reduced scope and possible delays to align capital expenditures with returns, given current increased capex and softer demand compared to 2021. The company’s take/pay contract with PepsiCo (PEP) for recycled PET (rPET) is anticipated to be fulfilled, potentially leveraging its Kingsport plant's rPET line.
Meanwhile, PepsiCo exhibits robust financial characteristics, including, as per InvestingPro, gross profit margins of 55% and 52 consecutive years of dividend increases, although it trades near its 52-week low of $127.75. The company recently acquired prebiotic soda brand poppi for $1.95 billion and raised its quarterly dividend by 5% to $1.4225 per share. However, PepsiCo reported a slight Q1 2025 EPS miss at $1.48 (versus $1.51 expected) on revenues of $17.92 billion (beating forecasts). Evercore ISI consequently lowered its price target on PEP to $140 from $155, maintaining an In Line rating, citing challenges in the Frito-Lay North America segment. PepsiCo aims for low single-digit revenue growth for the year but has adjusted its full-year guidance due to new tariffs and macroeconomic uncertainties.

Key Decisions for Investors

• Investors in Eastman Chemical should critically assess the company's revised strategy for the Longview facility, particularly capital expenditure adjustments and project timelines, following the $375 million grant cancellation.
• Evaluate the resilience of Eastman's rPET commitments to PepsiCo via its Kingsport plant, while remaining cognizant of the financial and operational implications of a potentially scaled-down or delayed Longview project.
• For PepsiCo, consider its strong fundamentals like 55% gross margins and consistent dividend growth alongside strategic moves like the poppi acquisition, balanced against the Q1 EPS miss, Frito-Lay North America segment pressures, Evercore ISI's reduced $140 price target, and cautious full-year guidance.
• Assess whether PepsiCo's current valuation near its 52-week low offers a compelling entry point, considering both its long-term strengths and acknowledged near-term operational and macroeconomic headwinds.