All through last year, and this year to date, Deere (NYSE:DE) has not just beaten analyst earnings estimates -- it's plowed them right under. When Deere reports its Q3 numbers on Wednesday morning, will they keep on growing?

What analysts say:

  • Buy, sell, or waffle? Seventeen analysts follow Deere, which gets nine buy ratings and eight holds.
  • Revenues. Analysts estimate that quarterly sales grew 6% to $6.65 billion.
  • Earnings. Profits are predicted to rise nearly 8% to $1.99 per share.

What management says:
C-level news first. Since we last saw Deere post earnings, the firm has added a new director to its board: Charles Holliday, Jr., the CEO of DuPont (NYSE:DD). Holliday joins a board jam-packed with big-firm names, including current and former executives from Lockheed Martin, Thomas & Betts, and BMW.

Business-wise, as 2006 wound down, Deere sounded a somber note. The company warned investors that it would be cutting production in an effort to address ongoing inventory issues -- especially in its construction & forestry segment. As a result, Deere was looking to post flat sales, and a 22% decline in net profits this year ($1.3 billion).

So far, so ... much better than promised. Year to date, Deere has in fact achieved 4% sales growth, 5% revenue growth, and its profits are down only 12% versus the first half of 2006. And according to CEO Robert Lane, this is just the beginning. The firm now expects that far from being flat, sales for the year will rise 6%, and profits will come in closer to $1.55 billion for the year.

What management does:
Helping translate the better-than-expected sales into the better-than-expected profits is Deere's improving profitability. Rolling gross and operating margins have been rising all year long -- putting the firm neck-and-neck for operating profit margins with rivals such as Caterpillar (NYSE:CAT), CNH (NYSE:CNH), and Kubota (NYSE:KUB). Net margins would have joined in the fun, but for the fact that up until last quarter, the rolling tally included nearly $230 million in "extra" earnings from discontinued operations, which dropped off of our trailing-12-month radar last quarter, seeming to hurt the net.

Margins

1/06

4/06

7/06

10/06

1/07

4/07

Gross

24.9%

24.9%

25.6%

26.3%

26.6%

26.8%

Operating

10%

9.4%

9.8%

10.9%

10.9%

11.2%

Net

6.8%

7.4%

7.5%

7.6%

7.6%

6.9%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

The Fool says:
I know what you're wondering: Did Deere succumb to the lure of easy money, and fail to follow through on its plan to cut inventories at the cost of profits?

Good news. It didn't (succumb), did (follow through), and average inventory levels are down an impressive 7% year over year in the last six-month period. And the story gets better -- accounts receivable are flat for the same period, even as year-to-date sales climbed nearly 4% in comparison to H1 2006.

In consequence, Deere's free cash flow situation has improved remarkably. While still burning cash in the first half, the negativity of free cash flow has declined by more than half versus H1 2006 -- which is all the more remarkable when you notice that the firm has been ramping up its capital spending. While I don't know whether the firm will achieve positive free cash flow for the year (it often does not), Deere is definitely pointing its tractor in the right direction.

Look over there! More Deere!

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.