Feb. 13 (Bloomberg) -- Deere & Co., the world's largest maker of tractors and combines, said earnings surged 55 percent as sales of farm equipment overcame a drop in demand for construction machinery. The company's profit forecast fell short of analysts' estimates, sending the shares lower

First-quarter net income rose to $369.1 million, or 83 cents a share, beating analysts' estimates. Revenue in the quarter ended Jan. 31 climbed 18 percent to $5.2 billion, aided by higher prices and currency translation, the company said today in a statement. The construction and forestry unit will come under ``continued pressure'' from the U.S. housing slump, Deere said.

Higher commodity prices and rising farm income buoyed agricultural equipment sales by a third, with Brazil and Central Europe leading overseas orders. The deepest housing recession in 27 years curbed sales of backhoes and forestry machines by 6 percent, and Deere said recent interest-rate cuts won't keep residential construction from staying ``far below'' last year's levels.

``The issue for Deere is can strength in agricultural equipment keep offsetting weakness in construction,'' said Ann Duignan, an analyst with Bear Stearns & Co. in New York. Duignan has an ``outperform'' rating on the Moline, Illinois-based company. ``The industry may continue to decline somewhat.''

Deere forecast net income this quarter of $700 million to $725 million, less than the $731.9 million predicted by six analysts surveyed by Bloomberg. Sales will rise 23 percent, to about $8.37 billion, compared with analysts' estimate of $7.42 billion. The company also reduced its forecasts for home building and economic growth.

Home Construction

Deere fell 94 cents, or 1.1 percent, to $85.54 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 67 percent in the past year.

Profit last quarter was projected to be 78 cents on sales of $4.81 billion, the average of 17 analyst estimates compiled by Bloomberg. Deere in November forecast net income of $325 million on revenue of $5.53 billion. The company earned $238.7 million, or 52 cents, a year earlier. The results include a 2-for-1 stock split that was approved in November and took effect Dec. 3.

Deere lifted its full-year net income forecast to $2.2 billion from a November projection of $2.1 billion. That's still shy of analysts' average estimate of $2.24 billion. Sales will rise 17 percent to $27.7 billion, compared with an earlier forecast of 12 percent, Deere said. Analysts, on average, expect $24.8 billion.

Sales at the construction and forestry machinery division fell to $1.03 billion, as home construction slowed to an annual rate of 1.006 million, the lowest since 1980. Profit rose 23 percent to $117 million, helped by price increases of as much as 6 percent.

Better Margins

The company today projected housing starts of 1 million this year, with U.S. economic growth slowing to 1.9 percent. That's down from its November forecast of 1.1 million starts and 2 percent growth. While Deere expects construction spending will fall 10 percent this year, the company said sales of its equipment will be unchanged because of strong non-residential construction and economic growth outside the U.S.

``The construction margins were surprisingly strong, despite a downturn in sales,'' said Stephen Volkmann, an analyst with J.P. Morgan Securities in New York. He has an ``overweight'' rating on Deere. ``The fact that they're driving higher margins in a lower sales volume is a real positive for them.''

Agricultural sales are forecast to rise 28 percent this year. Industry wide, the U.S. and Canada are expected to post revenue gains of as much as 20 percent, South America may increase 15 percent, and Western Europe is projected to climb 3 percent to 5 percent.

Corn Prices

Higher commodity prices and record farm income helped push tractor and combine sales up 33 percent in the quarter, to $2.76 billion. The U.S. Department of Agriculture forecast yesterday that 2008 farm receipts will be $92.3 billion, topping estimates of $88.7 billion for last year and 51 percent above the 10-year average of $61.1 billion.

Corn futures in Chicago reached a record on Feb. 6, and soybeans have gained 74 percent in the past year through yesterday as farmers planted more corn for ethanol. Outside the U.S., Brazilian farmers are buying more machines to harvest sugarcane, and Eastern European and Russian customers are switching to large, high-horsepower equipment.

``The global population boom has really affected agriculture related stocks in a positive way,'' John Derrick, co-manager of U.S. Global Investors Inc.'s MegaTrends Fund, said in an e-mailed statement. The firm managed $5.63 billion, including Deere shares. ``Alternative uses for crops, such as ethanol, only make them more valuable.''

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

Last Updated: February 13, 2008 16:31 EST