Shares of agricultural equipment maker Deere & Co. (NYSE: DE) are lower this morning despite posting stronger-than-expected first-quarter profit, as investors showed disappointment over its home building and economic growth outlook.
For the quarter, the world's largest manufacturer of agricultural machinery reported that its profit surged 55% to $369.1 million, lifted by crop grain prices that boosted international demand for agricultural equipment. Deere posted earnings of 83 cents per share, topping analysts' predictions for earnings of 78 cents per share in the quarter.
The agricultural equipment maker also announced a respectable 18% increase in revenues, to $5.2 billion, up from $4.43 billion a year earlier. Revenue during the period was helped by a 37% increase in overseas results that benefited from the weak U.S. dollar. Analysts had forecast $5.07 billion in revenue, according to Thomson Financial.
Farm equipment makers are currently taking advantage of some favorable trends, including the rise in investment in biofuels as well as higher international consumption, which have lifted demand for products such as tractors and combines.
Robert Lane, Deere's chairman and chief executive, shows optimism over the company's further gains, stating that Deere "remains in a prime position to benefit from powerful trends sweeping the world."
Looking ahead, Deere forecast a rise of 23% for its second quarter equipment sales and a growth of 17% for full-year 2008 sales. The company also sees second-quarter net income in a range of $700 million to $725 million and $2.2 billion for the full year.
So now the bad news. Based on the deep housing recession, Deere cut its outlook for home building and economic growth. The company now expects housing starts of one million this year, with U.S. economic growth slipping to 1.9%. Back on November of last year, Deere forecast 1.1 million starts housing and 2% economic growth.
For the moment though, analysts are selling off the stock on concerns over further pressure on the company's sales of construction and forestry machinery. One analyst at Bear Stearns, Ann Duignan, is putting under question the company's "strength in agricultural equipment" that should be able to fight against "weakness in construction. "
Eliza Popescu is a financial writer for the online investment advisory service Investor's Observer.
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