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Cabot slips amid downgrade, worry

Cabot Microelectronics tumbled 8 percent after a downgrade and cautionary comments about its third quarter.

Chip-equipment maker Cabot Microelectronics tumbled 8 percent after a downgrade and cautionary comments about its third quarter.

Shares of Cabot were down $6.05 to $70.26 amid signs that inventory problems continue in the semiconductor sector.

In April, the stock surged along with other chip-equipment makers on hopes that the time had come for a semiconductor turnaround. But since then, signs that the inventory glut have yet to be worked off have taken it down a few notches again.

Just yesterday, Chartered Semiconductor Manufacturing, which ranks as the third largest chip maker, said low global demand for chips will mean weak selling prices, poor factory utilization and ultimately greater losses than expected in the second quarter.

The news affects Cabot because it makes slurries, which semiconductor foundries like Chartered use to make chips.

Merrill Lynch analyst John E. Roberts reduced his intermediate-term rating on Cabot to "neutral," but maintained his long-term "buy" rating Wednesday.

While the company's sales growth could return to 50 percent rates within a year or so, it could be lackluster until then, Roberts said in a research note. The stock has doubled in price since its low after a disappointing March quarter, giving the company a rich valuation, Roberts added.

"We believe sales have remained flat sequentially since March, with Taiwan foundries being particularly weak," Roberts wrote.

The analyst reduced his third-quarter estimates to earnings of 35 to 30 cents a share, bringing them much lower than last year's third-quarter earnings of 38 cents a share. First Call's current consensus estimate is for earnings of 34 cents a share.

Salomon Smith Barney's Gil Yang also said in a research note Tuesday that Cabot's third quarter could be worse than expected.

Chartered's lowered revenue expectations for its June quarter suggest that the inventory correction continues. The news caused Yang to predict earnings of 32 cents a share for Cabot in its third quarter, and revenue of $52.6 million.

But on the bright side, Yang noted that "the bottom could be near" for Cabot, since Chartered indicated that its June quarter is expected to be the bottom, and the chip cycle is nearing an upturn. Yang reiterated his "buy" rating.