The Trouble With Deere & Co. (NYSE: DE)

Farm equipment maker Deere & Co. (NYSE: DE) reported better-than-expected earnings yesterday—but the stock still slumped 5.6% on the day.

In the quarter ended January 31, 2012, Deere’s sales rose 11%, to $6.8 billion. The company’s construction and forestry division was the standout, with a 22% sales jump. Sales of agricultural equipment rose 8%, as did financial services revenue. Deere’s overall earnings rose 4%, to $533 million.

The latest sales and earnings both topped Wall Street’s expectations of $1.23 a share in earnings on sales of $6.6 billion.

Deere & Co. Investors See Trouble Lurking Behind the Numbers

Jeff Windau, an analyst at Edward Jones, summarized the market’s response this way: “I think there was a good headline number with the earnings beat,” he said, “but I think as people started to dig in a little deeper, there were just a few items that raised questions.”

Those questions largely centered on a few key numbers in the earnings report. For one, the sales increase, while strong, was less than the company’s previously forecast gain of 16% to 18%. In addition, while Deere & Co. raised its full-year profit forecast by 2.3%, that was less than what many investors were expecting. Worries also abounded that the farm equipment market is at a peak, particularly in the U.S.

One analyst who shared that view was Rob Wertheimer of Vertical Research Partners. “Peaks are hard to time,” he said in an article on FoxBusiness.com, “but we think the market is approaching a peak.” He went on to state that with the strong rise in crop price increases of the past few years, most farmers who wanted new equipment have already bought it.

Some Analysts Worry That Deere’s Forecasts Are Unrealistic

For its part, Deere & Co. still expects farm equipment sales to rise 10% in the U.S. and Canada this year. Even in financially troubled Europe, the company sees its sales holding steady or even gaining 5%.

In an article entitled “Deere Is in Decline,” Benzinga.com writer Brett Callwood picked up on the disconnect between the company’s forecasts and the uncertain outlook for the agricultural business. He wrote:

“DE’s biggest market is still the U.S., and it is predicted that farm income will fall a further 6.5% this year, on top of 2011’s record $98.1 billion. This is due to rising crop acreage and costs continuing to slash at profits. The demand for combines in America has slowed dramatically, with sales falling a full 50 percent since January 2011.”

Is Deere & Co. the Best Way to Profit From Skyrocketing Food Demand?

One thing that most everyone agrees on is that food demand will keep rising in the years ahead as consumers in emerging markets grow richer. But are equipment manufacturers like Deere & Co. a good way to profit from that rising demand?

Research service Zacks.com continues to think it’s a good bet. Its view: “Deere continues to remain focused on expanding its production capacities. The company’s investments to expand capacities as well as to offer new products favorably position it to cater to the increasing demand for food, shelter and infrastructure, thereby fueling top line growth in the upcoming quarters.”

Despite yesterday’s selloff, the site is maintaining its short-term buy recommendation on the stock.

But to profit from rising emerging market food demand more directly, you’re likely better off investing in makers of fertilizers and seeds, like Potash Corporation of Saskatchewan (NYSE: POT) or Monsanto (NYSE: MON). In addition, as Seeking Alpha contributor Stephen Simpson writes, “farmers buy seeds every year and don’t have a lot of choice about it.”