Deere profit up on overseas sales

By James B. Kelleher

CHICAGO (Reuters) - Deere & Co. (DE.N) said on Wednesday net earnings in the latest quarter rose a better-than-expected 23 percent, driven by strong overseas sales of tractors and other equipment.

The company, whose shares rose more than 8 percent in early trading, also credited the strong results to its ability to pass along higher prices to farmers, who are feeling flush due to the excitement over ethanol and other biofuels, which has sent the price of many crops sharply higher.

"The margins were very big," said Eli Lustgarten, an analyst at Longbow Research. "There's just terrific profitability across the board."

The Moline, Illinois-based company also raised its forecast for fiscal 2007 earnings to $1.7 billion, up from $1.55 billion, saying it expected an increase in its agricultural equipment and commercial and consumer businesses to offset a decline in sales to builders and foresters.

"Global farm conditions remain positive, driven by growing economic prosperity, relatively high commodity prices, and robust demand for renewable fuels," Deere said in a statement.

John Kearney, an analyst at Morningstar, called the company's international performance "pretty positive, especially in South America."

But Deere, which competes with Caterpillar Inc. (CAT.N) in the construction machinery market, said the slump in the U.S. real estate market was taking a toll on that business.

"U.S. markets for construction and forestry equipment are remaining under pressure," Deere said. "Although nonresidential spending is growing, housing construction has experienced a significant downturn."

As a result, the company reported that U.S. sales of its equipment fell -- even though farmers spent more money on equipment, benefiting from the ethanol-fueled rise in corn and soybean prices.

U.S. farmers are forecast to have planted the most acres of corn this spring since 1944 as they took advantage of the rise in corn prices to 10-year highs in February, on demand from the ethanol sector.

But how sustainable that rise will be is a matter of debate. In its release on Wednesday, Deere cut its projection for corn prices for the 2007-2008 crop to $2.90 per bushel from $3.40 and cuts its forecast for 2008-2009 to $3.25 from $3.55.

"The whole corn sector is becoming a little more questionable," Lustgarten said.

For the most recent quarter, Deere reported earnings of $537.2 million, or $2.37 a share, up from $436.7 million, or $1.85 a share, last year.

Net revenue rose 6 percent to $6.634 billion, lifted by a 30 percent rise in sales outside the United States and Canada, where sales actually dipped 5 percent despite the ethanol-fueled ramp up in corn production.

Analysts on average expected Deere to report earnings of $1.99 a share on sales of $6.063 billion, according to Reuters Estimates.