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Deere Profit Tops Forecasts; Shares Down On Outlook

Deere & Co. posted a quarterly profit on Wednesday that topped Wall Street's expectations, driven by strong sales of tractors and other agricultural equipment as U.S. farmers ramp up corn production to meet growing demand for ethanol.

But the shares were down in midday trading, with some investors concerned that the company's profit outlook for the rest of the year was conservative.

The world's largest market of agricultural equipment reported second-quarter profit of $623.6 million, or $2.72 per share, easily topping the $2.41 per share that analysts, on average, had expected, according to Reuters Estimates.

On a continuing operations basis, which factors out $227.6 million in profit from the company's discontinued health-care business, profit was up 20.6 percent from $517 million, or $2.17 per share, a year earlier.

Including health care, last year's net profit was $744.6 million, or $3.13 per share.

Net revenue for the second quarter rose 4.9 percent to $6.88 billion, up from $6.56 billion a year earlier. Analysts had been expecting $6.27 billion.

"The company is poised to realize substantial benefits from powerful global economic trends, such as growing affluence, increasing demand for food and the rising use of biofuels," Robert Lane, chairman and chief executive, said in a statement.

Deere said it expects to report third-quarter profit of $400 million to $425 million, with sales up 5 percent. For the year, it sees profit of $1.55 billion, on 6 percent sales growth.

After hitting a fresh lifetime high of $123.40 early in the session, Deere shares were off 86 cents at $119.80 in midday New York Stock Exchange trading, amid concerns about the profit forecast.

"Management outlook is for net income of $1.55 billion for (2007) and this only takes into account the beat this morning," wrote Bear Stearns analyst Ann Duignan, in a note to clients.

The shares are up 24.7 percent this year.

"The market had even headier expectations built into the stock price," said John Kearney, equity analyst at Morningstar, in Chicago. "The stock has just had so much optimism built into it that it was hard for it to go much higher."

CORN POPS ON ETHANOL BOOM

Like rivals Agco Corp. and CNH Global NV, Moline, Illinois-based Deere has benefited from investor excitement over ethanol, the corn-based fuel additive that has lifted the prices of several key commodities.

Since tractor and combine sales typically rise and fall with farmers' cash receipts, higher corn and soybean prices have raised expectations that the agricultural equipment industry is on the verge of a surge in demand.

"Any increased acreage and improvement in the farmers' balance sheets is good for Deere," said Kent Croft, president of the Croft Funds Corp., which manages about $560 million in assets and holds Deere shares.

U.S. farmers, hoping to capitalize on the boom in ethanol, are expected to plant more than 90 million acres to corn this spring, according to a report released last month by the U.S. Department of Agriculture. It would be the largest corn acreage since 1944.

Rising corn demand reflects the ramp-up in production of ethanol, the pollution-reducing additive that replaced methyl tertiary butyl ether in U.S. gasoline due to a 2005 law.

Deere shares trade at about 18.1 times forecast 2007 earnings, a premium to the forward price-to-earnings ratio of 16.8 for the Standard & Poor's capital goods industry index.