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A shadow was cast over

Sun Microsystems


today, as it dipped toward a new 52-week low on a critical downgrade and worries that it would be lowering its financial estimates tomorrow.

A note by

Merrill Lynch

analyst Tom Kraemer downgraded the company to neutral from accumulate based on the company's weak showing in the growing data storage market and a bulge in inventory. Kraemer also cut his estimates for this year's and next year's earnings.

In recent trading, Sun was trading at a 52-week low, down $2.44, or 11%, to $19.81.

The increasing softness in corporate IT budgets has dogged the stock for some time; it has dropped more than 27% this month.

The belief is growing that Sun will use tomorrow's conference call as an opportunity to lower guidance for the coming two quarters. CEO Scott McNealy's scheduled participation in the call bolsters that belief. Analysts have noted that he rarely makes an appearance on the calls.

Merrill's Kraemer observed that channel inventories are at a three-year high and more of Sun's servers might become available as defunct dot-coms dump their equipment on the market. Working off that inventory could take three quarters, Kraemer wrote. Merrill has done recent underwriting for Sun.

Spending on data storage remains strong, Kraemer wrote, but Sun is not capitalizing on it and is especially vulnerable to competition from storage vendors, according to the analyst.

"Poor storage execution is coming home to roost," Kraemer wrote. He noted that storage vendors such as EMC could gain access to Sun's accounts through storage solutions.

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"The simple truth is that the server giant does not have an enterprise solution that can meet customers' growing needs" for storage, Kraemer wrote.

Kraemer followed up his original note with a later one, writing that his first opinion was not a " 'dump Sun' forever call."

Storage stocks, which have suffered in the past week since a warning by



last week, were mixed today. Emulex, which had fallen nearly 59% since it reported delays in some orders, was trading up 81 cents, or 2.5%, to $32.88.

Storage switch maker



, which reports earnings today, was up in recent trading. The stock had dropped 39% since the beginning of last week. It was trading higher, up $2.69, or 6%, to $47.56, as analysts predicted it would announce strong earnings today.

But the earnings report by



yesterday kept a damper on some optimism. Finisar, which supplies parts for both optical and storage networkers, reported earnings in line with Street estimates but forecast a slower outlook for the coming quarter.