Deere profit tops forecasts

CHICAGO - Deere & Co, the world's largest maker of agricultural equipment, today posted quarterly profit that beat Wall Street forecasts, supported by strength in its the construction unit.

Deere, whose shares rose 2 per cent, said better pricing and lower retirement costs supported results, while planned lower manufacturing volumes and higher raw material costs applied pressure. Farm equipment sales declined.

"The number is pretty much where they thought it would be," Longbow Research analyst Eli Lustgarten said. "It looks like the underlying profitability was better than expected." Moline, Illinois-based Deere reported a fiscal second-quarter profit of US$744.6 million ($1.22 billion), or US$3.13 a share, compared with US$604 million, or US$2.43 a share, a year earlier.

Excluding its discontinued health-care business, and expenses for a debt redemption and a factory closing, Deere earned US$2.37 per share. Analysts on average expected US$2.31 per share excluding one-time items, according to Reuters Estimates.

Deere, which also makes construction equipment and lawn and garden products, said revenue rose 2 per cent to US$6.56 billion. Farm equipment sales fell about 7 per cent in the quarter, while construction and forestry unit sales rose 10 per cent.

"I was impressed that they had a slowdown in the top line on the agricultural equipment sector but operating margin remained relatively high," Morningstar analyst Scott Burns said, adding that construction equipment remains "the star of the portfolio." Analysts expect 2006 to be a down year for Deere and rivals Agco Corp and CNH Global because of declining farm cash receipts, rising interest rates, high fuel and fertilizer prices and uncertainty about government subsidies.

However, investors have bid up the shares of the three companies on excitement about ethanol, the pollution-reducing additive that is replacing MTBE (methyl tertiary butyl ether) in US petrol under an energy bill signed into law in 2005.

The expectation is that the new law will increase demand for crops such as corn used to make ethanol and will encourage farmers to buy more equipment as they boost production.

Deere's full-year forecast was about unchanged, given no change in its farm equipment sales outlook, an increase in construction and forestry sales projections, and a cut in its commercial and consumer sales outlook, Lustgarten said.

Farm equipment sales are expected to be flat to down 2 per cent for the year, Deere said. Deere raised its forecast for sales growth in the construction and forestry unit, to a range of 10 per cent to 12 per cent, from 8 per cent to 10 per cent.

It lowered its full-year sales growth forecast for commercial and consumer equipment to 7 per cent to 9 per cent, from a prior forecast for 10 per cent to 12 per cent growth.

Deere said it expects net income of from US$400 million to US$425 million in its fiscal third-quarter, and about US$1.7 billion for the fiscal year.

Excluding a plant closing in Canada, debt redemption and the discontinued health care business, Deere said it expects fiscal 2006 earnings of US$1.54 billion from continuing operations.

Deere's forecast from continuing operations translates to about US$6.47 a share, based on 238.1 million shares outstanding. Analysts expect US$6.40 per share excluding one-time items.

Shares of Deere were up US$1.78 at US$89.30 Tuesday on the New York Stock Exchange. Through Monday, Deere stock had risen 28.5 per cent so far in 2006, outperforming the Standard & Poor's 500 index.

- REUTERS