"We expect steel and other commodity costs to be a headwind all year," Chief Financial Officer Bradley Halverson said during the conference call.
"Price versus material costs were very favorable on the first quarter," Amy Campbell, director of investor relations at Caterpillar, said during the call. "We expect it to be favorable for the full year. But for the balance of the year, we would expect material costs increase to be greater than price realization."
President Donald Trump recently announced plans to implement a 25% tariff on steel imports and a 10% tariff on aluminum, although imports from some countries have been exempted.
Caterpillar stock fell 6.4% to close at $144.19 after opening up 3%.
The construction equipment company beat expectations for both earnings and revenue in the fiscal first quarter and raised its full-year forecast.
"Performance was largely driven by better-than-expected volumes on improved end-market demand as well as favorable changes to dealer inventories; pricing was a net positive," JPMorgan analyst Ann Duignan wrote in a note.
The Deerfield, Ill.-based company reported a profit of $2.74 a share, compared to 32 cents during the same period a year ago. Earnings, adjusted for one-time items, came in at $2.82 a share, topping estimates of $2.12. Revenue of $12.9 billion also surpassed analysts' estimates of $11.96 billion, according to FactSet.
"The combination of strength in many of our end markets and our team's continued focus on operational excellence -- including strong cost control -- helped us deliver improved margins and a record first-quarter profit," the company said in a statement.
Given the strong results and higher demand across all regions, Caterpillar raised its full-year outlook and now expects 2018 profit in a range of between $9.75 and $10.75 a share, compared to its previous guidance of $7.75 and $8.75. Adjusted earnings are anticipated to be in the range of $10.25 to $11.25 a share, up from $8.25 to $9.25. The company said the revised outlook does reflect an assumption for higher material costs.
"Our main initial takeaway from first-quarter results is that the $2.00 hike in EPS guidance gives a glimpse of what investors have been waiting to see, which is how profitable Caterpillar can become," BMO Capital Markets analyst Joel Tiss wrote in a note.
Credit Suisse analyst Jamie Cook said CAT's full-year outlook was raised primarily on better-than-expected sales volume across all three segments and secondarily because the company is improving its ability to collect full price for its products, which Cook expects to be partially offset by higher material costs.
To be sure, "the outlook assumes that first-quarter adjusted profit per share will be the high water mark for the year," said Halverson.
Earlier this week, Citigroup analyst Timothy Thein upgraded Caterpillar to buy from neutral as he believes the industrial giant is poised to benefit from improvements in the Chinese construction sector.
"Recent outsized seasonal draws in China steel [inventories] point to improving construction sector activity," Thein wrote in a Monday research note. "Our commodities team believes a pick-up in China growth indicators is coming, which would help to lift industrial metals prices."
"We also believe CAT has been able to increase prices in China on the back of the strength in construction markets (and low dealer inventories)," Thein said.
Caterpillar said that its China business is stronger than it expected.
"We started the year expecting industry demand to be up about 8%," said Campbell. "We now expect the China 10-ton excavator demand to be up 30% this year."
There are 18 Buys, eight Holds and two Sell ratings on the stock, according to Bloomberg data.
-- This story has been updated to include commentary from the conference call.