Aug. 15 (Bloomberg) -- Deere & Co., the world's largest maker of farm equipment, said third-quarter profit rose 13 percent, helped by sales of construction machinery and higher prices. The company lowered its 2006 forecasts.

Net income increased to $436 million, or $1.85 a share, from $387 million, or $1.58, a year earlier, the Moline, Illinois- based company said today in a statement. Sales rose 7.6 percent to $6.27 billion in the quarter ended July 31.

Commercial and retail projects spurred purchases of construction gear and helped counter slowing demand for tractors, and Chief Executive Officer Robert Lane limited production to avoid excess inventory. Revenue from Deere's equipment businesses will post slower-than-expected growth this year as higher fuel and fertilizer costs eat into farm budgets.

``Construction and commercial is offsetting weak farm sales,'' said Eli Lustgarten, an analyst at Longbow Research Inc. in Cleveland. He rates Deere shares ``neutral'' and doesn't own them. ``As we look into 2007, construction is expected to weaken and agricultural-equipment demand becomes even less certain because of lower farm production.''

Deere forecast net income of $1.63 billion for the year, less than the $1.7 billion projected in May. That puts profit excluding some items at $6.18 a share, Lustgarten said, trailing a $6.44 average estimate in a Thomson Financial survey. Sales from its equipment units will rise as much as 3 percent, rather than as much as 5 percent.

Shares of Deere rose 33 cents to $69 in New York Stock Exchange composite trading. The shares have fallen 5.2 percent in the past year.

Farm Budgets

Lane, 56, introduced dozens of products to entice farmers into purchases and raised equipment prices to help shore up profit and make up for the lower manufacturing volumes in the agricultural business. Profit exceeded the $1.81 average analyst estimate in a Thomson Financial survey in the period.

Sales in the agricultural unit, Deere's largest, rose 1 percent to $2.9 billion and its operating profit fell. Sales in the construction division rose 13 percent to $1.61 billion and made up more than 25 percent of sales in the quarter.

Without the impact of the price changes and foreign currency translation, worldwide equipment sales were little changed. Net pricing was up about 3.5 percentage points, spokeswoman Marie Ziegler said on a conference call. Higher costs for large tires, some steel products and shipping hurt profit, she said.

Net income will be $200 million this quarter, with equipment sales rising 1 percent, Deere said. That would be about 98 cents a share in profit excluding some items, according to Lustgarten. That would trail the $1.31 estimate from Thomson.

More Research

Deere, which competes with Duluth, Georgia-based Agco Corp. and Amsterdam-based CNH Global NV, in May predicted a 5 percent decline in industrywide sales of agricultural equipment in North America this year as farmers cope with the cost of oil.

Lane's inventory-reduction program reduced trade receivables and inventory to $6.26 billion from $6.53 billion a year earlier. Deere plans to reduce working capital, which includes inventory and receivables, by $475 million this year, Ziegler said. That implies that the company is producing about 5 percent fewer items than it is selling, to reduce inventory, she said.

``Execution cannot offset weakening fundamentals,'' said Andrew Obin, an analyst with Merrill Lynch in New York who rates Deere ``neutral'' and doesn't own the shares. The ``lower earnings outlook reflects lower expectations for agricultural equipment sales in fiscal year 2006.''

Rivals also chopped inventory. Agco said last month it cut production 20 percent last quarter, and CNH said it is producing 15 percent less than its retail sales to cut stockpiles.

Deere expects to increase research and development costs by 8 percent this year to help introduce products in the next 12 to 18 months, Ziegler said.

Health Unit

The company sold its managed health-care business to UnitedHealth Group Inc., the second-biggest U.S. medical- insurance provider, in December for $500 million.

Profit from continuing operations rose to $435.7 million, or $1.85 a share, from $378.8 million, or $1.55, a year earlier.

Six analysts suggest buying the shares and six recommend holding them, according to data compiled by Bloomberg. None have ``sell'' recommendations.

To contact the reporter on this story: Carol Wolf in Cleveland at cwolf@bloomberg.net.

Last Updated: August 15, 2006 16:10 EDT