Aug. 13 (Bloomberg) -- Deere & Co., the world's largest maker of farm equipment, reported third-quarter earnings that missed analysts' estimates on higher raw material costs and said fourth-quarter profit will be below projections.

Deere dropped the most in 20 years in New York Stock Exchange composite trading. Net income rose 7.1 percent to $575.2 million, or $1.32 a share, from $537.2 million, or $1.18, below the $1.37 average analyst estimate.

Costs for freight and materials such as steel were $140 million more than a year earlier, outpacing gains from higher tractor and combine prices. The worst U.S. housing slump in at least 17 years triggered declines in construction revenue and profit and Deere said sales of backhoes and bulldozers will fall as much as 5 percent, more than it previously forecast.

``Construction sales were weaker than I expected,'' said Eli Lustgarten, an analyst with Longbow Securities in Independence, Ohio, who rates the stock ``neutral.'' ``It's a moving target and construction's not getting any prettier.''

Sales in the period ended July 31 rose 17 percent to $7.74 billion, Moline, Illinois-based Deere said in a statement today. The average of 17 analyst estimates compiled by Bloomberg was for profit of $1.37 a share and sales of $7.19 billion. The company in May forecast net income of $550 million to $575 million.

Fourth Quarter

Fourth-quarter profit will be $425 million, Deere said. Analysts on average projected about $490 million. The company expects equipment sales to grow 29 percent.

Deere plunged $7.73 to $61.62 at 9:37 a.m. in New York and earlier declined 12 percent, the biggest percentage drop since Oct. 26, 1987. The company completed a 2-for-1 stock split in December.

It was the second straight quarter that Deere missed estimates, after exceeding expectations in every quarter since August 2005. The stock fell 9.9 percent on May 14 after profit missed estimates by 1 cent and the company said at the time third-quarter earnings would be lower than analysts expected.

For the full year, Deere forecast equipment sales will rise 21 percent, 1 percentage point above their May projection. The company said at the time that 2008 income will be about $2.2 billion. Analysts, on average, predict earnings of $2.22 billion and sales of $26.1 billion.

Construction and Forestry

Construction and forestry revenue fell 7 percent, to $1.19 billion as U.S. housing conditions hurt sales of backhoes and bulldozers in North America. Profit fell 38 percent to $93 million.

Deere said construction sales will fall as much as 5 percent, down from a May forecast that called for a decline of as much as 3 percent. The company expects housing starts to drop to about 900,000 this year, a 60-year low.

``Construction is still weak,'' said Bill Batcheller, senior vice president at Butler Wick & Co. in Youngstown, Ohio. The firm manages about $925 million, including Deere shares. ``Did they get the bar low enough or do they have to ratchet down the forecast? Maybe there's room for a little more conservatism.''

Agriculture sales climbed 35 percent, to $4.54 billion, and profit rose 47 percent to $634 million, the company said. Demand for food and biofuels such as ethanol have buoyed prices of commodities, including corn and soybeans, driving sales of Deere's agriculture equipment to farmers with more money to spend.

Deere projects farm sales will climb 38 percent this year, led by a 40-percent industrywide gain in South America, where the company is adding products and sugarcane harvests are spurring growth. Industry sales in the U.S. and Canada are expected to rise as much as 25 percent.

To contact the reporter on this story: Courtney Dentch in New York at cdentch1@bloomberg.net.

Last Updated: August 13, 2008 09:45 EDT