Steel Kills Deere

Commodities have been a double-edged sword for Deere & Co in the last quarter; the rising cost of crops has sent the demand for the farming equipment makers through the roof, but the rising cost of steel is leaving the company to worry about parts it may need for its machines.

Shares of Deere & Co. dropped 9.9%, or $8.94, to $81.25, by the close of trading in New York on Wednesday.

Deere & Co. (nyse: DE - news - people ) is benefiting from the increase in agricultural activity due to the higher demand in ethanol production and is getting a boost in exports as the dollar's decline fuels foreign sales. Although the company continues to struggle in North America where its non-agricultural equipment businesses are primarily reliant.

Before the bell on Wednesday, the Moline, Ill.-based equipment manufacturer reported revenues of $8.1 billion for the second quarter of 2008, up 17.4% from the year prior period. Sales from equipment operations accounted for $7.5 billion and were up 19.0% from the second quarter of 2007. Currency translation and price changes had a positive effect of 8.0% in the quarter.

Income for the period jumped 22.4% to $763.5 million, or $1.74 per share. Analysts surveyed by Thomson Financial had expected earnings of $1.75 per share on sales of $7.6 billion.

Sales outside North America increased 46.0% during the quarter with a positive currency translation effect of 14.0%.

"Advanced offerings that help efficiently meet the world’s growing need for farm products are lending strong support to our performance and are bringing John Deere quality and value to a growing global audience," said Robert W. Lane, chairman of Deere. "All our businesses are benefiting from the consistent execution of our plans to create a fundamentally more resilient enterprise. As a result, the company’s non-agricultural operations have remained solidly profitable in spite of the economic downturn in the United States, while our performance overall continues on a record pace."

Sales in the construction and forestry equipment division were down 13.3% to $1.3 billion from $1.5 billion the year prior period, while sales in the consumer and commercial equipment sector were up 7.7% to $1.4 billion.

"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."

The company forecasts a 20.0% increase in sales for the third quarter with 4.0% currency translation impact. Profits are expected to be in a range of $550 million to $575 million for the third quarter.

JPMorgan analyst Stephen Volkman believes Deere is being conservative with its guidance, despite the company noting that raw materials costs would rise in the second half of 2008. Volkman added that the increase the sales forecast to 20% from 17% was due to currency translation.