Caterpillar Inc. shares are heading for the biggest drop in four months as investor worries mounted on warnings of weaker China demand and rising costs for the maker of iconic yellow bulldozers.

The company said sales of its machines in China will be softer this year, a sign of cooling expectations in the world’s second largest economy. The revelation came after the U.S. maker of heavy equipment for the mining, construction and energy industries posted lower-than-expected quarterly profit for the first time since the start of the pandemic, thanks in part to unfavorable raw material costs.

Caterpillar has grappled with rising freight and material costs along with global supply chain troubles that have posed large hurdles to the producer since the start of the pandemic, eating into profit margins. Still, the company has repeatedly raised prices of its equipment to offset these pressures to great success.

Still, in China specifically, Chief Executive Officer Jim Umpleby warned of slowing business ahead after a “softening” of demand last year. Caterpillar’s benchmark for China demand is the excavator market, which Umpleby said will be weaker this year than last.

“We don’t see signs of improvement at this point,” Umpleby said Tuesday in a conference call with analysts, noting that the company’s benchmark for China demand — the 10-ton-and-above excavator market — will be weaker this year than last.

Shares fell 3.4 per cent to US$252.66 at 1:56 p.m. in New York, on pace for the biggest decline since Sept. 23. The drop has dampened the company’s stock gains in January, which were up about 9 per cent before posting quarterly results.

“Caterpillar shares started the year really strong, they were outperforming industrial peers,” Matt Arnold, an analyst at Edward Jones, said in a phone interview. “But when you think about excavator demand in China and what happened, it was unsustainably strong — it’s kind of like the hangover.”

Caterpillar’s net earnings were hurt by a goodwill impairment charge tied to its locomotive business and unfavorable currency impacts, specifically from the euro, Japanese yen and Australian dollar. Adjusted earnings of US$3.86 a share missed analysts’ estimates for the first time in 11 quarters.

Still, the Irving, Texas-based company is optimistic about the year ahead, saying it expects sales to increase from last year with the help of favorable prices even as dealer inventories remain little changed. Any concerns about manufacturing costs will be more than offset by price hikes this year, according to a quarterly presentation.