UPDATE: J.P. Morgan Downgrades Caterpillar on Weaker Execution, Mounting Headwinds

In a report published Thursday, J.P. Morgan analyst Ann Duignan downgraded the rating on Caterpillar CAT from Overweight to Neutral, and lowered the price target from $105.00 to $90.00. In the report, J.P. Morgan noted, “We are downgrading CAT from OW to N on weaker execution and mounting headwinds. CAT missed Q3 estimates and lowered its outlook on continued weakness in its Resource business; and while this was not a surprise, what concerns us is the decremental margin (or 'pull-through') in Construction of 47% on weak pricing and mix and its guidance of 30% for the company in FY'13. Management appears to have stepped back from its 25% pull-through target (now targeting 25% in upside and 25%-30% in downturn, implying a lower overall pull-through), and seems hesitant to take out additional capacity, even in the face of a multi-year down-cycle in mining. In our view, costs are not coming out fast enough, particularly in Resource, which will likely remain a headwind in FY'14. Additionally, oil prices are trending down, a new risk to Power Systems into 2014 which is by far its most profitable segment. That said, we believe that there is little downside risk to the stock after yesterday's sell-off; we believe the stock will likely be range-bound until management demonstrates consistent execution to plan, or until sentiment around mining turns positive.” Caterpillar closed on Wednesday at $83.76.