Deere 2Q profit rises, but warns of cost trouble ahead

Global demand lifts ag machinery maker Deere's 2Q profit by 22 pct, warns of cost pressures

ST. LOUIS (AP) -- Deere & Co., the world's biggest maker of farm machinery, said Wednesday its second-quarter profit rose 22 percent, propelled by lofty crop prices that stoked global demand for its farm equipment despite a faltering U.S. economy.

But the Moline, Ill.-based company warned that rising costs of such raw materials as steel could cut into its earnings over coming months, sending its shares down nearly 10 percent Wednesday. Deere also said it was seeing spot parts shortages "cropping up."

The maker of tractors and harvesting machinery said its profit for the period ended April 30 jumped to $763.5 million, or $1.74 per share, up from $623.6 million, or $1.36 per share, during the same period last year.

Deere said sales rose to $8.1 billion from $6.9 billion a year ago. The company said its sales outside North America soared 46 percent during the quarter, dwarfing the 6 percent jump of its sales in the U.S. and Canada.

Analysts surveyed by Thomson Financial had expected earnings of $1.75 per share on sales of $7.6 billion. The earnings estimates typically exclude one-time items.

Although Mike Mack, Deere's chief financial officer, told analysts during a conference call the sales and earnings were the company's highest ever for any quarter, Deere's shares slid as some analysts wondered aloud whether Deere had lost some momentum.

"Deere had really been leaping over earnings estimates for years, and that came to an end today," said Matt Collins, an analyst at St. Louis-based Edward Jones. "It was a good solid quarter, but investors were looking for more."

Deere has benefited from higher farm prices around the world that have been fueled by increased ethanol production, and farmers benefiting from higher grain commodity prices are upgrading their equipment. Deere also is enjoying an export boom as the dollar's decline overseas makes its products cheaper in most markets beyond North America.

The company said it expects third-quarter and full-year sales to rise about 20 percent, sticking with what some analysts consider its conservative forecast that earnings would be $550 million to $575 million during this quarter and about $2.2 billion for the full year. Analysts surveyed by Thomson Financial were expecting earnings of $650 million for the third quarter, about $2.3 billion for the full year.

But Mack told analysts that the cost of raw materials were "racing ahead well beyond what we anticipated," and shortages of various parts and components "are cropping up from time to time" despite suppliers' best efforts.

For the first six months of the fiscal year, Deere said it earned $1.13 billion, or $2.56 per share, on $13.3 billion in sales. That compared with $862.3 million , or $1.88 per share, on $11.3 billion in sales a year earlier.

While crediting Deere with keeping its earnings guidance unchanged for the rest of the year, Collins said the company's tendency to be "pretty darn conservative here for the last couple of years" helped it consistently top Wall Street's estimates. Now, he said, "I think investors now are wondering if it's over."

Deere also makes construction and forestry equipment such as backhoes, excavators, riding mowers and leaf blowers.

"There's no doubt the ag business has the wind at its sales, but the rest of the company is fighting the housing recession here, a weakening U.S. economy that may or may not be in a recession," Collins said. "But the ag story is still very bullish globally, and everybody knows it. That's why (Deere's) stock had performed so well, and that's why expectations were running so high."

Deere's shares fell $8.94, or 9.9 percent, to $81.25. They are still closer to the upper end of their 52-week range of $56.50 to $94.89.