UPDATE 5-Deere's modest forecast overshadows earnings beat

* Currency translation seen as concern

* EPS $1.30 vs Street view $1.24

* Sales rise 11 pct to $6.77 bln

* Shares down more than 5 percent

By John D. Stoll

Feb 15 (Reuters) - Deere & Co's quarterly earnings beat Wall Street expectations, but shares of the world's largest agricultural equipment maker fell after it failed to raise its full-year forecast high enough to please investors.

The company said on Wednesday that earnings rose nearly 4 percent in the fiscal first quarter, ended Jan. 31, as hefty demand and a 4 percent price increase on agricultural and construction machinery offset higher costs for production, materials and environmental controls.

The stronger-than-expected results led the company to increase its full-year profit forecast by 2.3 percent to nearly $3.3 billion.

Deere previously told analysts that first-quarter results would be down from a year earlier because of higher costs. The size of the earnings beat led some investors to expect a greater increase in the full-year forecast.

CURRENCY EXCHANGE, EUROPE STRONGER

Deere announced a more positive view on the European market. Previously, it said the region's demand for farm products would not grow in 2012. But now it sees a potential for as much as a 5 percent increase, and this will hurt the company's currency translation.

Deere spokesman Ken Golden said, "As the dollar strengthens versus other currencies, especially the euro, our sales in overseas markets translate to fewer dollars."

During a conference call, Deere executives said the company was particularly concerned about $100 million in unfavorable currency translations that will crimp margin growth this year.

Higher costs will also pressure results, Deere said, even though it expects sales for the year to rise 15 percent. Thus far, Deere has been able to pass on higher costs to customers, but a significant decline in agricultural conditions, such as crop prices, could throw that strategy off track.

Shares of Moline, Illinois-based Deere fell 5 percent to $84.48 in Wednesday afternoon trading. The stock closed higher both Monday and Tuesday, and the shares are trading nearly $30 above their 52-week low.

"Investors interpreted the new outlook as disappointing. We disagree," JPMorgan equities analyst Ann Duignan said. She is encouraged by "strong global fundamentals" for the sectors where Deere does business, and the company projected market share gains.

Duignan said Deere trades at too deep a discount compared with Caterpillar Inc, another U.S. industrial powerhouse that has been racking up sales and profit records. Caterpillar, a construction machinery maker, was down 2 percent to $112.06 Wednesday but has a market cap double that of Deere.

COMBINE ISSUE CLEARS UP

Duignan credited Deere with better managing inventories of used combines in the United States. The company said it has tweaked production in order to tighten supply and insisted that bloated-inventory concerns are yesterday's news.

Investors showed concern late last year when Deere signaled a need to trim combine production.

Despite the disappointing outlook, Deere's quarterly results, coming two days after the U.S. government forecast a robust corn planting season, could give investors renewed confidence in an agricultural sector that sizzled in 2011.

Demand for fuels such as ethanol and a continued increase in the need for global food supplies are factors underpinning strong agricultural results.

Deere, like U.S. rivals Agco Corp and CNH Global , reported record revenue and stronger margins for 2011. The sector's strength has led to greater employment and fostered a move by foreign rivals, such as Japan's Kubota Corp, to try to buy up assets that would help them better compete.

CONSTRUCTION STRONG

Deere's continued surge in construction and forestry sales showed the company's bet on global infrastructure activity and construction was paying off. This year, the company expects the construction division to be its fastest-growing unit, buoyed by international markets and strength in the rental, energy and material-handling sectors.

The company posted first-quarter net income of $533 million, or $1.30 per share, up from $513.7 million, or $1.20 per share, a year earlier. Analysts on average had expected $1.24 a share, according to Thomson Reuters I/B/E/S.

Sales increased 11 percent to $6.77 billion, beating analysts' expectations of $6.5 billion. The company previously said it expected at least 16 percent top-line growth.

Agricultural product sales increased 8 percent, while construction and machinery sales rose 22 percent. Profit margins in the construction equipment unit increased significantly.

Deere maintained its forecast for 15 percent sales growth for all of 2012. It said sales would increase 15 percent in the current quarter, above analysts' expectations, as it maintains its pricing power.

Deere has increased its profit outlook for the year to $3.28 billion from $3.20 billion.

The company expects agricultural equipment sales to increase 10 percent in the United States and Canada. It expects sales to be flat to moderately higher in Europe and flat to moderately lower in South America, which is experiencing a drought.