Strong sales of Deere & Co.'s farm equipment pushed up the company's third-quarter net income by 15 percent, and it boosted its 2011 outlook after beating Wall Street expectations for both quarterly revenue and profit, but none of that appeared to satisfy investors Wednesday.
Its shares declined $1.12 to $74.04 in afternoon trading.
Analysts raised concerns about how much cost increases were hurting Deere's margins, and the company's outlook for the year represented only a modest improvement from conservative earlier predictions.
Deere said it benefited from strong sales, the weak dollar and price increases. Equipment sales outside the U.S. and Canada grew 49 percent. They rose 10 percent in the United States and Canada.
Deere's net income was $712.3 million, or $1.69 per share, in the quarter that ended July 31. That's up from $617 million, or $1.44 per share, in the same period last year. The company, based in Moline, Ill., said its quarterly revenue grew 22 percent to $8.4 billion from $6.84 billion.
Analysts surveyed by FactSet on average expected earnings per share of $1.67 on $7.52 billion revenue.
Edward Jones analyst Jeff Windau said investors may have been expecting still more because of recent strength in the agriculture sector.
"There's just some concern about profitability," Windau said.
Deere said its costs increased 23 percent to $7.29 billion in the quarter from last year's $5.92 billion as raw materials and research and development grew more expensive. Deere is rolling out new products to comply with new EPA air pollution regulations so its R&D costs have risen considerably.
Another reason for the share drop might be that Japan's earthquake and tsunami proved to be a much smaller drag on earnings than expected, said Credit Suisse analyst Jamie Cook.
Deere predicted earlier this year that the Japanese disaster would cut its sales by $300 million, but the actual impact was about $70 million.
Cook said that lesser impact bumped up Deere's third-quarter earnings about 9 cents per share and helped Deere beat Wall Street expectations.
Deere expects its 2011 equipment sales to grow 25 percent to $29.47 billion. That's up from a previous forecast for 20 percent growth. Analysts were expecting 2011 sales of $29.05 billion, according to FactSet.
The company also slightly lifted its profit forecast, from $2.65 billion to $2.7 billion, or about $6.40 per share.
Jefferies & Co. analyst Stephen Volkmann told clients Wednesday that Deere's quarterly results were good but not great and its forecast for 2011 profit suggests a disappointing fourth quarter.
Deere's 2011 net income forecast is in line with Wall Street expectations, but that would mean fourth quarter results of about $1.39 per share that would fall about 5 cents per share short of expectations, Volkmann said.
Still, Chairman and CEO Samuel Allen said global trends in food, as well as demand for shelter and infrastructure, have provided positive signals going forward.
"We remain confident that these positive macroeconomic trends have staying power and should prove rewarding to the company and its stakeholders in the years ahead," Allen said.
Allen said the recent turmoil in financial markets and concerns about the health of the global economy have added some uncertainty to Deere's short-term outlook.
But Deere officials still feel good about the outlook for farming worldwide, which should translate into strong demand for the company's tractors, combines and other equipment.
"The global ag fundamentals are still extremely strong. I can't emphasize enough that Thursday's USDA report was very positive for global agriculture," said Marie Ziegler, Deere's treasurer.
The company is now predicting U.S. farmers will get cash receipts of about $377 billion in 2011, up from $325 million last year.
In another important market, Deere trimmed its prediction for Brazilian farm income to $20.2 billion from an earlier forecast of $26.1 billion. But that result would still be better than last year's $15.4 billion farm income in Brazil.
Deere's results offer an indication of how well farmers worldwide are doing. In addition to agricultural equipment, Deere makes construction and forestry equipment, such as backhoes, excavators, riding mowers and leaf blowers. But construction and forestry sales represent a small portion of Deere's business compared to its agricultural equipment.
Deere & Co.: www.deere.com