Deere & Co. (DE) Tuesday posted a 27 percent increase in quarterly profit on strong demand for its construction equipment and tractors, especially in North America.

The company, whose shares were up 2.5 percent, also boosted its full-year profit and sales outlook.

"I'm pretty impressed," Morningstar analyst Scott Burns said. "The world had been thinking that agricultural equipment was headed for a downturn. This pretty much says that is not the case."

In April, shares of Deere and other farm equipment makers fell after disappointing North American retail tractor sales in March, raising fears among some investors that farm equipment demand may be peaking.

Deere earned $604 million, or $2.43 a share, in its fiscal second quarter, compared with $477.3 million, or $1.88 a share, in the year earlier quarter.

Sales and revenue in the quarter ended in April rose 13 percent from last year to $6.62 billion. Sales of the equipment operations rose to $6.02 billion from $5.3 billion last year.

Analysts were expecting Moline, Ill.-based Deere to earn $2.14 a share on sales of $5.85 billion, according to Reuters Estimates. In February, Deere forecast net income of $500 million to $525 million.

Sales of tractors and other agricultural equipment have soared industrywide in the past year as bumper crops and high demand boosted U.S. farm income to record levels. However, many companies have struggled to handle the surge, with supply bottlenecks and higher raw material costs hurting margins.

Deere's agricultural equipment division sales increased 17 percent in the second quarter, reflecting continued strong retail demand and the benefit of the weak U.S. dollar. The operating profit rose 13 percent.

The commercial and consumer equipment division saw sales fall 6 percent due to bad weather hurting sales of consumer riding lawn equipment. Operating profit fell 11 percent.

The construction and forestry division sales rose 28 percent, while operating profit improved 62 percent. Improved pricing in all businesses offset higher raw material costs.

Deere said it now expects 2005 net income of $1.55 billion to $1.6 billion, up from its previous forecast of $1.5 billion. It also forecast third-quarter net income of $450 million to $475 million.

It boosted its equipment sales outlook to expected growth of 9 percent to 11 percent, excluding the impact of currency, up from the previous forecast for growth of 6 percent to 8 percent. For the third quarter, company equipment sales are expected to rise 13 percent to 15 percent.

The weak U.S. dollar is expected to add two percentage points to the total to both periods.

Production levels are expected to fall 7 percent to 9 percent in the second half of the year with most of the reduction occurring in the fourth quarter.

Deere said the U.S. farm sector is expected to remain in solid condition for the rest of the year as a result of a high level of cash receipts and strong farmer balance sheets. It expects U.S. and Canadian industry retail sales in fiscal 2005 to be up 5 percent to 10 percent.

Industry retail sales in Western Europe are forecast to be down 5 percent for the year as equipment sales in Spain and Portugal are being hurt by dry weather. In South America, sales are now forecast to be down about 40 percent, mostly due to weakness in Brazil.

Worldwide sales of John Deere agricultural equipment are forecast to be up 9 percent to 11 percent for the year, excluding the impact of exchange rates. Currency is expected to add about three percentage points.

Sales of John Deere commercial and consumer equipment are forecast to be flat to up 3 percent. Sales of construction and forestry equipment are expected to rise 18 percent to 20 percent.

Deere shares rose $1.52 to $61.31 on the New York Stock Exchange (search).