Shares of

Eastman Chemical

(EMN) - Get Report

were down nearly 7% after Bernstein lowered its investment rating on the stock to underperform from market perform, citing slack demand in the cigarette industry.

Bernstein said it expects Eastman, which makes chemicals, fibers and plastics, to miss consensus estimates for the fourth quarter "significantly" and possibly fall short for 2003 as well. "This is likely to be the result of lower acetate tow sales to the cigarette industry," analyst Graham Copley wrote in a research note. "The filter tow business at Eastman has very high operating leverage, and slower sales can mean much lower earnings per share."

Bernstein sharply lowered its fourth-quarter outlook for Eastman, saying it expects the company to post a net profit of 15 cents a share, compared with its previous estimate of 63 cents a share. The firm also lowered its near-term price target to $32. Wall Street analysts were expecting the company to earn 41 cents, according to a poll conducted by Thomson Financial/First Call. For the full year, Bernstein took its guidance down to $1.42 a share, flat with 2001, compared with a prior estimate of $1.90 a share. Analysts, on average, were looking for a profit of $1.68.

"Sales though Q3 this year have been very strong and out of line with demand for cigarettes, suggesting an inventory build at the customer level," Copley wrote. In light of this fact, Bernstein expects fourth-quarter filter tow sales to shrink as much as 32% sequentially. "With lower cigarette sales expected in the U.S. in 2003, it is likely that this business will fall short of expectations in 2003 also," he said. The firm revised its 2003 earnings estimate to $2.50 from $3.

Eastman has a history of unexpected earnings disappointments and, typically, the stock reacts badly to the news. The shares were down $2.69, or 6.8%, at $36.91 in midday trading.