Caterpillar Inc. stock plunged Tuesday, giving up its earlier gains due to concerns that the rising cost of materials could squeeze its profit margins following the tariffs U.S. President Donald Trump placed on imports of steel.
Those concerns overshadowed the heavy equipment makers’ strong performance during its most recently ended quarter. At the same time, the largest maker of heavy equipment in the world upgraded its outlook on profit for its 2018 full year.
However, investors became concerned about comments by management that the performance during the first quarter was the year’s high watermark. While the company expects earnings will remain strong the rest of this year, it cautioned it would not continue with the same pricing power due to the increase in material costs.
On Tuesday, shares of Caterpillar opened higher and increased by up to 4.6% during early trading, buoyed by the outlook on earnings. That however, was short lived as shares tumbled in less than two hours.
When CFO Bradley M. Halverson labeled profits for the first quarter the year’s high watermark, shares started giving up their gains and when he began taking about prices and material costs for later in the year, the stock selloff took off in earnest.
Caterpillar shares end down 6.2% on the day and at one stage has lost over 11% from the previous intraday high.
The slide by Caterpillar exacerbated the drop the entire market. The Dow Jones, of which Caterpillar is one of 30, closed off on the day by 424.56 losing almost 1.74% from its Monday close.
President Trump’s tariffs on steel and aluminum imports have made the supplies within the domestic market constrained, which in turn has inflated costs for the metal. Caterpillar announced that steel costs across the equipment industry had increased by 15% during the quarter.
In order to compensate, Caterpillar is carrying out increases in prices that would take effect during the middle of 2018.
Other companies have also been relying on increased prices to protect their profit margins. Donaldson Company, which is a filter maker for heavy equipment makers, last week announced increases of prices of between 4% and 15%, citing higher costs of steel that were squeezing its profit margins.
The import tariffs are pushing steel prices up during a time inflation could also be increasing, which could prompt the U.S. Federal Reserve to increase interest rates which could slow growth down in the economy and crimp demand domestically.