By Rajesh Kumar Singh
CHICAGO (Reuters) - Caterpillar Inc's (N:CAT) shares tumbled on Tuesday, giving up early gains on concerns that rising materials costs could squeeze profit margins for the heavy equipment manufacturer following U.S. President Donald Trump's crackdown on steel imports.
Those worries overshadowed its strong performance in the March quarter. Profits and revenues topped analysts' estimates, while the world's largest heavy equipment maker also upgraded its profit outlook for the full year 2018.
Yet investors grew concerned about management's comments that first-quarter performance was the "high watermark" for the year. While Caterpillar expects earnings to be strong for the rest of 2018, the company cautioned it would not have the same pricing power to pass on increased material costs.
"It's a negative surprise because the indications had previously been that everything was okay on that front," said Lawrence T. De Maria, co-group head of Global Industrial Infrastructure at William Blair & Company.
Shares in Caterpillar, part of the Dow Jones Industrial Average (DJI), were last down 6 percent at $144.68 on the New York Stock Exchange after gaining as much as 4.6 percent in early trade.
The sell-off exacerbated the fall in the broader market. The Dow Jones Industrial Average (DJI) shed 508 points on Tuesday and was last trading down 2.1 percent.
President Donald Trump's crackdown on steel imports has constrained supplies in the domestic market, inflating costs of the metal. Caterpillar said steel costs for the equipment industry were up about 15 percent in the March quarter.
To compensate, the company is carrying out price increases that would come into effect in the middle of the year.
Other companies also are relying on price increases to protect profit margins. Last week, Donaldson Company Inc. (N:DCI), which makes filters for heavy equipment makers, announced price increases of 4-15 percent, citing higher steel costs the company said were squeezing profit margins.
The Institute for Supply Management (ISM) survey published this month showed a surge in the cost of raw materials and worries among manufacturers about the impact of Trump's steel and aluminium import tariffs.
The tariffs are pushing up steel prices at a time when inflation could be heating up, prompting the Federal Reserve to hike U.S. interest rates which could in turn slow economic growth and crimp domestic demand.
OUTLOOK REVISED UPWARD
The Deerfield, Illinois-based company now expects full-year profit to range between $9.75 to $10.75 per share, $2 above its range in January.
Caterpillar, which serves as a bellwether for global economic activity, has benefited as the global economy has had its best run since 2011. With the International Monetary Fund predicting robust global growth for the next two years, demand for its equipment is expected to remain strong.
In the latest quarter, revenues rose 31 percent on year to $12.9 billion, above Wall Street's expectations, as strong commodity prices and increased construction activities in North America and China drove up sales of mining and construction machines.
Overall sales were also boosted by favourable currency impacts and improved price realization.
"The first quarter was an exceptional quarter for performance," said Amy Campbell, head of investor relations at Caterpillar.
While she said the performance would not be repeated, the company still expected "strong" operating margins for the full-year. Caterpillar also said it expected sales volume to grow thanks to higher demand across all regions and most end markets.
TRADE WORRIES
Caterpillar's 2018 forecast did not include potential impact from future geopolitical risks and increased trade restrictions. But in its annual report this year, the company warned that "buy national" policies or retaliation against such policies could hurt operations.
Threats of a global trade war pose the biggest risks for a company that sells more than half of its machines outside the United States.
The company reported a net profit of $2.74 per share for the quarter, above analysts' consensus forecast of $2.04 per share. Adjusted net profit was $2.82 per share.