NEW YORK Deere & Co (DE.N), the world's No. 1 maker of farm equipment, gave a 2011 forecast that was slightly below Wall Street forecasts, citing income lost from Japan's earthquake, sending its shares slightly lower.
The forecast outweighed a stronger-than-expected quarterly profit report, which showed strong demand for large machines in North and South America. Price increases, the weak U.S. dollar and a lower-than-expected tax rate also helped Deere's earnings beat.
Investors are concerned about Deere's future margins because of rising raw materials costs and other expenses, and fret that rapid growth in Brazil, a key market, may be slowing, said Edward Jones analyst Jeff Windau.
"It was a solid quarter but we've seen that with other industrials, that if there are any concerns raised with regard to margin, other companies have been hit pretty hard, too," Windau said.
Deere, which competes with Agco Corp (AGCO.N) and CNH Global NV CNH.N, estimated 2011 net income of $2.65 billion. Based on 426.4 million shares outstanding, that works out to $6.21 per share, below the $6.25 Wall Street was expecting.
The March earthquake and tsunami in Japan will reduce full-year sales by about $300 million and operating profit by $70 million, the company said.
"Guidance is slightly below consensus," UBS machinery analyst Henry Kirn said, adding that Deere forecasts are typically conservative.
HEALTHY FARM ECONOMY
Overall, net earnings rose 65 percent to $904.3 million, or $2.12 per share, in the fiscal second quarter ended April 30, from $547.5 million, or $1.28 per share a year earlier.
Analysts, on average, expected profit of $2.06 per share, according to Thomson Reuters I/B/E/S, although several noted that a lower-than-expected tax rate helped Deere beat estimates.
(For a graphic, see r.reuters.com/fyc69r)
High food prices are expected to lift farm profits to record levels this year despite higher costs for seeds and fertilizer. That is leading farmers to invest in equipment to boost productivity.
"Deere has proven themselves to be the highest-quality company in the sector," said Kent Croft, co-manager of the Croft Value Fund, which holds about 78,000 Deere shares. "Farmers' balance sheets are in really good shape and probably will be for the foreseeable future."
Some analysts who follow the farm equipment sector predict corn prices could double in coming years amid the tightest supply in 15 years. Soybeans and wheat have also rallied.
Deere equipment sales, which exclude sales from a finance arm, of $8.33 billion beat forecasts of $8.14 billion. International sales rose 27 percent, helped by a 3 percentage point boost from currency.
Demand for large farm machinery was strong in the United States, Canada and Brazil, Deere said, and U.S. demand for construction machines is in early stages of recovery. However, forestry and construction sales -- a much smaller business than its farm machinery unit -- were up less than expected.
"Growth is slower coming out of this recession than in previous ones," Susan Karlix, Deere's manager of investor communications, told analysts on an earnings conference call.
Deere reduced its 2011 forecasts for U.S. economic growth, home construction and government spending, factors that drive sales of construction equipment. But it kept unchanged its forecast for the construction and forestry division's sales, citing global demand from timber companies, who are enjoying strong pulp prices.
Deere forecast equipment sales to rise 21 percent to 23 percent this fiscal year, marking an improvement from its February forecast.
Its shares were down 1 percent at $86.02 in afternoon trading on the New York Stock Exchange. They had fallen as low as $84.65 earlier.
(Reporting by Nick Zieminski; Editing by Derek Caney, Dave Zimmerman)