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John Deere’s expectations, earnings continue to grow

With its latest quarterly earnings report, farming and forestry equipment maker John Deere (NYSE: DE) trounced analysts’ expectations and then expanded its forecasts.

Net earnings more than doubled over year-ago levels, to $514 million, while revenue advanced 27 percent to $6.1 billion. Worldwide total equipment operations’ net sales increased by 30 percent year over year, with the U.S. and Canada rising 35 percent, and other areas climbing 22 percent.

Operating profit for equipment operations more than doubled. Agriculture and Turf sales expanded by 21 percent, while Construction and Forestry sales grew by a whopping 81 percent. Operating margins expanded nicely across the board.

Agriculture and Turf sales are expected to increase by about 16 percent in 2011, based on anticipated strength in global farm conditions. That’s up from a previous expected increase of about 8 percent. Construction and Forestry sales are seen rising by about 35 percent, up from a 25 percent to 30 percent expectation.

Challenges do lie ahead for the industry, such as substantially higher raw material costs. Nevertheless, management believes that higher sales volumes will largely offset those increases, along with improved factory utilization and increased prices. All in all, the company has raised its 2011 profit forecast nearly 20 percent to $2.5 billion, compared with its $2.1 billion expectation as recently as November.

Deere has recorded a solid quarter and appears to be headed even higher.

Ask the Fool

Q: Does a mutual fund’s tax efficiency matter in tax-deferred accounts? – J.R., Biloxi, Miss.

A: Not so much. Tax efficiency is generally important. It’s tied to a fund’s turnover ratio, which reflects buying and selling activity within the fund. Funds with low turnover are hanging onto their shares longer, making fewer or smaller taxable distributions of gains to shareholders. That’s usually good. (Funds’ after-tax returns are now required to be listed along with pre-tax returns.)

In tax-deferred accounts such as 401(k) plans or traditional IRAs, dividends and capital gains accumulate tax-deferred until you withdraw your money. Favor them with your least tax-efficient investments, such as high-yield bonds, funds with significant short-term capital gains, taxable bonds, real estate investment trusts (REITs), and stocks you plan to hold for less than a year.

Learn more at /mutualfunds.htm.

Q: Is it OK to hang on to my loser stocks, waiting for them to recover before I sell, so that I can get back some of my lost money? – G.Z., Canton, Ohio

A: Not really. Imagine that your shares of Tattoo Advertising (ticker: YOWCH) are underwater by $1,000 and that you’ve found some companies with good potential to appreciate. If you sell your Tattoo shares for a loss and move what’s left into one of those companies, you’re more likely to earn back that $1,000 — or more. Why try to earn a certain amount in a stock you’ve lost faith in when you can more reliably earn that same amount or more elsewhere? Keep your money invested in your best ideas.

Hanging onto a stinker can be smart if the company merely hit a temporary snag and your research suggests it still has strong prospects.

My dumbest investment

My dumbest investment was selling my shares when they hit the $270 range. – J.A., online

The Fool responds: Too many people erroneously think that a high number for a price means a stock is too expensive. By itself, a stock price tells you very little. A $3 stock may be grossly overvalued, while a $270 stock … well, it might be headed to $400 and beyond, as Priceline was.

You need to compare the price to other numbers, such as earnings and expected growth. Recently at $450, Priceline shares have been trading at a P/E of 48, nearly 50 times their trailing 12-month earnings. But with earnings growing at roughly 25 percent annually, its P/E based on future earnings is closer to earth, near 25.

Before you sell, you should consider whether the company still has strong growth prospects and if its stock is trading at a reasonable or attractive price. Priceline bulls expect the recovering global economy to boost sales, and they like its low debt, fat profit margins and hefty return on equity. Bears worry that the stock has gotten ahead of itself.