The threat that rising input prices pose to corporate profit margins was highlighted again as a number of U.S. manufacturers, including Emerson Electric Co and Paccar Inc, reported quarterly earnings.
Earlier this week, Illinois Tool Works, which makes a variety of products for the automotive, residential construction, and industrial marketplace, warned it might not be able to fully recoup all the raw material price increases it is seeing — even though it expects to raise prices this year.
The prices of steel, copper and aluminum — key components in many products — have all crept higher over the past three months amid growing signs that North America and Europe are joining the emerging markets in putting the recent recession behind them.
Copper, which is used in cables, wires and all kinds of electrical products, as well as in plumbing and heating applications, has risen the most, jumping more than 15 percent over the past three months.
Those increases are putting pressure on the margins of many manufacturers, who cannot always simply raise the price of their finished goods.
That was the issue in the most recent quarter for Emerson, which makes automation equipment for factories and network power systems for large data centers. The St. Louis-based company reported results that fell short of analysts’ expectations, largely because of higher raw material costs.
Paccar, which makes commercial trucks and diesel engines, didn’t disappoint Wall Street this quarter, reporting earnings in line with Wall Street’s hopes. But the Bellevue, Washington-based company warned that increases in commodity prices would “moderate” its operating margins this year and partially offset what it predicted would be global rebound in demand for commercial vehicles.
To be sure, not everyone is crying the rising raw material cost blues. Pentair Inc reported a 59 percent rise in quarterly earnings. The results, which beat Wall Street expectations, were lifted by sales of water filters in emerging markets.
Pentair said it now expects its materials costs to rise by 3.5 to 3.6 percent this year, ahead of the 2.5 percent material inflation rate it had presumed in December when it set its full-year profit forecast. But the Minneapolis-based company told investors it expects to raise prices at its filtration and technical products units to match rising raw material costs — a sign of its increased confidence in the economy’s recovery, according to Chief Executive Randall Hogan.
“I wouldn’t say people are welcoming them,” Hogan said of the price increases, “but they are understanding them given the way material prices are … The fact that inflation now looks a little bit stronger than, a little bit higher than we might have thought two or three months ago, it’s going to help us realize a higher percent of the price increases we implement.”
Cummins Inc also reported a higher-than-expected quarterly profit as strong sales of its engines and other products in China, India and Brazil offset continued weakness in North America.
The strength in those markets helped offset what the company characterized as “a significant decline” in the North American truck engine market, which continues to suffer as a result of the weak U.S. economic rebound and a change in emissions standards that has made engines more expensive.
