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Deere in Headlights: Should Market Hit the Brakes?

Deere gladdens the market with a bullish outlook on demand for 2010, but some wonder whether that demand is for real.
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MOLINE, Ill. (TheStreet) -- Deere (DE) - Get Report emboldened investors on Wednesday with word that orders for its farm equipment are improving so much that it had no choice but to hike its earnings forecast for 2010.

Shares of the big tractor and thresher maker jumped by as much as 8% during Wednesday's regular session, though the stock gave back some of those gains toward the end of the day, closing at $56.48, up $2.70, or 5%. Volume reached 17.4 million shares, more than triple the daily average turnover in the name over the last three months.

Deere told investors and analysts that it now expects a profit of $1.3 billion for 2010, almost 50% more than its prior forecast of $900 million. That translates to $3 a share, above the $2.56 that Wall Street, on average, was expecting.

Though the company cited such things as positive currency exchange rates for the increase, the real driver behind the revised outlook, Deere executives said, was fundamental -- sales, and especially sales of the company's core product in its core market: farm equipment in North America.

The company said it now expects its total revenue in 2010 to increase by 6% to 8% from the $20.8 billion it booked in the prior year.

The outlook overshadowed a

huge earnings beat for Deere

. Profit in the fiscal first quarter came to 57 cents a share, destroying the Wall Street consensus target of 19 cents a share, according to a poll of analysts by Thomson Reuters.

Sell-side analysts mostly reacted to the news with an outpouring of praise. Almost begrudgingly, Sterne Agee analyst Larry De Maria upgraded Deere's stock to buy from neutral. In a research note to clients, he wrote, "We have been waiting patiently for a pullback in

Deere shares to become more aggressive but no longer feel that is likely, barring an outright negative turn in fundamentals... The reasons for waiting no longer exist."

De Maria raised his price target on the stock to $66 from $52. He was particularly impressed by Deere's ability to shift its sales efforts to more profitable pieces of equipment, such as its new, higher-horsepower tractors and combines.

For other professional Deere watchers, though, the company's outlook was somewhat less than transparent. Alexander Blanton, of Ingalls & Snyder, called into question just how much Deere's projected sales growth in 2010 will come from stronger end-user demand -- real demand from real farmers -- and how much from the fact that 2009 saw a vicious decline in dealer inventories of agricultural equipment, a far greater drop than what's likely to occur in 2010, Blanton said.

Unlike

Caterpillar

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(CAT) - Get Report

, however, Deere does not disclose changes in dealer inventory levels, making it difficult for analysts and investors to evaluate the veracity of the company's sales forecasts. (Caterpillar's inventory levels fell by $3.9 billion in 2009.)

In other words, Blanton said, "There's very little visibility here."

Like all agricultural companies, Deere's prospects largely depend on crop prices. When the going rates for corn and wheat shoot higher, farmers become more willing to spend on new tractors and new threshers. Crop prices, however, are notoriously unpredictable -- even for the

Farmers' Almanac.

Deere nevertheless made predictions for crop prices in 2010, lifting its forecasts for corn, wheat and soybeans. But those new projections are still well below the prices those commodities fetched the year before. (Corn sold for $4.06 a bushel in 2008-2009, for example; Deere is predicting $3.50 a bushel this year).

"That doesn't mean Deere won't meet its sales forecasts," added Blanton. But he wondered aloud whether Deere had fully accounted for the projected crop-price decline in its 2010 sales targets. Maybe it had, he said. "We just don't know. All we can say is: forecasts are uncertain in this business."

Further, said Blanton, even if Deere hits its $3-per-share target for 2010 earnings, it's stock is still expensive, trading at more than 18 times its closing price Wednesday. "That's way too high for a farm equipment company, considering it's so hard to forecast."

Others are less concerned by the murky inventory issues. "They'll get to three bucks a share," said Eli Lustgarten, an analyst at Longbow Research. "The question is: how sustainable is the demand? We won't know until later this year," when crops are harvested and the relative flushness of North America's farmers becomes clearer.

-- Written by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.