(Bloomberg) -- Caterpillar Inc. slumped the most since November after the heavy-equipment maker warned that rising costs will erode margins, highlighting concerns that inflation pressures pose a risk to corporate profits and the economic recovery.
Shares slid as much as 4.4%, even after Caterpillar posted better-than-expected profit and said it's raising prices. The outlook, following four straight quarters of improvement, will be mostly driven by employee compensation. The company said it's also facing a rise in raw-material and freight costs.
Caterpillar, considered an industrial barometer, has benefited from reopening economies that have driven orders for equipment this year. At the same time, that demand is also helping push up costs as businesses struggle to keep pace and inflation accelerates. The chief of Newmont Corp., the biggest gold producer, said last week that the mining industry is starting to see cyclical cost pressures from labor, energy and raw materials.
“In the third quarter we expect it to be a small headwind and we expect sequentially for margins to decline,” Chief Financial Officer Andrew Bonfield said in a phone interview. “The biggest factor for us is not material cost increases this year, it's short-term incentive compensation that is a bigger margin headwind for us.”
Shares of Caterpillar are still up about 13% this year.
The company said price increases implemented mid-year and at the beginning of the year will offset raw-material costs. Caterpillar is a large consumer of steel to make its machinery, and domestic prices of the metal are up almost 90% so far in 2021.
“Moderating margin expectations is probably not enough to drive additional near-term excitement, in our view,” Jefferies analyst Stephen Volkmann said in a note to clients.
Investors are watching Caterpillar for signs of whether demand is holding up in the face of the persistent coronavirus and supply snags in many industries. The world's biggest producer of mining and construction machinery also reported second-quarter earnings that topped analysts' estimates amid surging demand for the company's yellow diggers, bulldozers and trucks.
While surging commodity prices and robust construction have prompted replacement of aging equipment fleets, the virus and worries over inflation have cast a pall over the economic outlook. U.S. economic growth missed forecasts in the second quarter as the effects of supply-chain constraints rippled through industries.
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