May 14 (Bloomberg) -- Deere & Co., the world's largest maker of tractors and combines, declined in New York trading after saying profit this quarter will fall short of analysts' estimates as U.S. construction slows and material prices jump.

Deere dropped as much as 9.9 percent, the most since January, in New York Stock Exchange composite trading. The Moline, Illinois-based company said third-quarter profit may be no more than $575 million, below the average estimate of $654.6 million in a Bloomberg analyst survey.

The forecast was in today's report for fiscal second-quarter profit, which rose 22 percent and also trailed estimates. Deere now says construction-machine orders will fall 3 percent in 2008, instead of being unchanged, as U.S. homebuilding nears a 60-year low. Chief Executive Officer Robert Lane is relying on farm-tool sales as demand for food and biofuel lifts commodity prices.

``They failed to meet the heightened expectations,'' said Larry DeMaria, an analyst with Sterne Agee & Leach in New York who has a ``sell'' rating on Deere. ``It was a good, clean quarter, but it underscores that they're human and not immune to the macro conditions.''

Net income climbed to $763.5 million, or $1.74 a share, in the second quarter ended April 30 from $623.6 million, or $1.36, a year earlier. The average of 17 analyst estimates was $1.75 a share. Sales rose 18 percent to $8.1 billion. Currency translation and price increases added 8 percent to sales.

Deere said income this quarter may be $550 million to $575 million, citing unspecified higher material prices. The benchmark price for sheet steel rose to a record $850 a ton in April, up 53 percent from a year earlier, Purchasing magazine said.

Shares Decline

Deere fell $8.94 to $81.25 at 4 p.m. in New York Stock Exchange composite trading in the biggest loss since Jan. 17. The stock has lost 13 percent this year.

The stock was raised to a ``buy'' by Andrew Obin, an analyst with Merrill Lynch & Co. He said today's decline is an opportunity to invest in Deere because it is ``well-positioned to take advantage of the long-term boom in soft commodities.''

Deere's results hurt shares of other machinery companies as well. Caterpillar Inc., the world's largest maker of earthmoving equipment, fell $1.32 to $82.75. Agco Corp., the second-largest U.S. maker of farm equipment, dropped $2.54 to $57.51.

Deere reaffirmed its 2008 forecast of full-year net income of $2.2 billion. Analysts, on average, project profit of $2.3 billion. The company predicted full-year sales growth of 20 percent, to about $28.5 billion, above an earlier projection for a 17 percent gain. Analysts project sales of $25.9 billion.

Company Guidance

``The guidance going forward was much more conservative than the Street,'' said Eli Lustgarten, an analyst with Longbow Research in Independence, Ohio. He rates Deere ``neutral.'' ``They're consistent with what they're saying: strong in agricultural, weak in other markets and higher material costs.''

Deere has been hit by rising prices for materials such as steel, which represents as much as 20 percent of its costs, DeMaria said. He lowered his stock-price target to $70 from $73.

Material and freight costs will rise as much as $500 million this year, twice as much as the company's earlier forecast, Marie Ziegler, vice president of investor relations, said on a conference call with analysts today. Deere previously expected costs to rise $250 million this year. The company spent $60 million more than in the year-earlier quarter.

``The forecast assumes we'll see a ramp up in the third quarter and some in the fourth quarter,'' Ziegler said. ``Interim price increases, because of the backlog, won't have an impact on fiscal 2008, but we are looking for it in fiscal 2009.''

Construction and Farm Sales

Construction machinery sales fell 7.2 percent to $1.35 billion and operating profit declined 14 percent to $166 million. Deere blamed part of the decline on U.S. housing starts, which in March slowed to the lowest rate since 1991.

Agriculture equipment sales climbed 34 percent to $4.7 billion and operating profit rose 61 percent to $782 million. Record farm income and a U.S. economic stimulus plan that allows farmers to write off the value of new equipment sooner are expected to lift sales of tractors and combines in North America. In Brazil, farmers are buying tractors to feed new sugarcane mills and ethanol demand.

``New equipment purchase are correlated to high crop prices and there's been a little sustainability on that,'' said Bill Batcheller, who helps manage $85 million in assets including Deere shares at Butler Wick & Co. in Youngstown, Ohio. ``The fundamentals look pretty good, particularly internationally.''

The company forecast agricultural sales in the U.S. and Canada may rise 20 percent industrywide this year, while South America may grow 30 percent. Deere previously expected growth of 15 percent to 20 percent in North America and at least 15 percent in South America.

In February, Deere forecast second-quarter net income of $700 million to $725 million and sales growth of 23 percent, to about $8.37 billion.

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

Last Updated: May 14, 2008 16:23 EDT