Potentially good news for Caterpillar (CAT) and Deere (DE): Heavy farm equipment sales soared last month.

Problem is, no one knows exactly why.

CNBC reports (video below) that sales of large two-wheel-drive tractors rose 33%, and four-wheel-drive tractors were up 9%. Combine sales were on the march as well.

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This comes as analysts were expecting year-over-year drops for 2010. For the first month of the year, at least, that wasn't the case.

That's lifting investor spirits for a sector that everyone thought would be pretty bleak. Adding to the enthusiasm: The U.S. Department of Agriculture is forecasting net farm income to grow by nearly 12% this year after falling 35% last year, according to Dow Jones.

Morgan Stanley lifted its rating on Caterpillar to overweight from underweight, MarketWatch reports. In fact, it's the first time analysts at Morgan have been positive on Caterpillar in three years of coverage. (Post continues after video)
Morgan also raised its target price to $70 from $51, and said it was hoping for $8 to $10 in earnings. Caterpillar is trading around $56 Friday, just climbing back from a nearly 20% drop over the last month.

One of the shining stars in the sector lately has been Agco (AGCO), a farm-equipment maker that recently wowed analysts with its fourth-quarter results and set 2010 guidance above estimates.

Key to Agco's future success is its increased presence outside of North America, particularly in Eastern Europe, China, Argentina and Brazil, writes Beacon Asset Managers on Seeking Alpha. Demand for machinery won't be fully met, however, until credit markets recover.

Rivals like Deere are also ready to pounce, but Agco is significantly less leveraged and has a better price-to-sales ratio, Beacon writes.

Deere had a small setback this week, when news emerged that its largest shareholder, Capital World Investors, lowered its stake in the company by 22.4% late last year, according to Dow Jones.