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Downgrade hobbles Applied Materials shares

Applied Materials shaved off $2.63, or 6 percent, to $42.88 Wednesday after Merrill Lynch cut the stock from a near-term “accumulate” recommendation to a near-term “neutral.”

The world’s largest chip-equipment maker has absorbed several downgrades and revenue revisions in the past month following its strong fourth-quarter earnings report.

On Tuesday, Thomas Weisel Partners analyst Eric Ross cut Applied (Nasdaq: AMAT) from a “buy” rating to a “market perform.”

With chipmakers issuing profit warning after profit warning in the past few weeks, it was almost inevitable that Applied Materials would begin to feel some of the heat itself.

Last quarter, Applied topped analysts’ estimates when it earned $664 million, or 77 cents a share, on sales of $2.92 billion.

However, several analysts were disappointed by the total sales figure, expecting something closer to $2.95 to $3 billion in the quarter.

Following the earnings report, Wit SoundView analyst Michael O'Brien, who was expecting fourth-quarter sales of at least $2.95 billion, sounded a familiar refrain.

"As we look into the chip-end markets (computers, communication and consumers), we see demand…less robust than we would have anticipated and inventory building up," he said in a research note.

Applied shares fell to a 52-week low of $37.25 earlier this month after profit warnings from Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD) rocked the semiconductor sector.

Among other chip-equipment stocks, Lam Research (Nasdaq: LRCX) was off $1.63 to $16.44; Novellus Systems (Nasdaq: NVLS) shed 88 cents to $30.75 and KLA-Tencor (Nasdaq: KLAC) was off $1.69 to $30.94 in afternoon trading.

First Call Corp. consensus expects Applied to earn 76 cents a share in its first quarter and $2.90 a share in the fiscal year.

Twenty-five of the 30 analysts following the stock maintain either a “buy” or “strong buy” recommendation.