Merrill Lynch believes investors might have gotten all they can from Lucent ( LU) for the time being.

As a result, the firm downgraded Lucent Friday morning, sending shares of the telecom equipment maker lower in premarket trading.

Merrill cut its rating to neutral from buy, based on the stock's valuation and saying the shares have exceeded its $2.50 price target. In addition, Merrill doesn't expect any improvement in the sector in the intermediate term.

Now that the shares have filled the valuation gap compared with competitor Nortel ( NT), Merrill said investors should consider certain risks surrounding Lucent. For starters, the firm believes Lucent has limited ability to continue reducing costs, and Merrill said the possibility exists of an additional decline in wireless spending.

In addition, Merrill said the sales improvement from services and IP routing has been pushed out into the future. Last but not least, Lucent is facing a possible 20% dilution of its shares associated with the settlement of a lawsuit and preferred shares that can be assigned to the company.

Shares of Lucent were sagging before the opening bell. The stock was down 8 cents, or 3.1%, to $2.47 on Instinet.