Deere (DE, Financial) saw its stock rise today after reporting fourth-quarter 2024 earnings that exceeded analysts' expectations, despite a 33% year-over-year revenue drop to $9.28 billion. The earnings beat was driven by tight cost controls and reduced production costs amid easing inflation. This comes after disappointing earnings from peers CNH Industrial (CNH, Financial) and AGCO Corp. (AGCO, Financial) earlier this month.
Despite the earnings beat, the collective reports from DE, CNH, and AGCO suggest a grim outlook for the U.S. farming industry.
- All three of DE's business units—Production & Precision Agriculture, Small Agriculture & Turf, and Construction & Forestry—experienced significant double-digit revenue declines. The largest unit, Production & Precision Agriculture, saw a 38% year-over-year revenue drop to $4.3 billion due to reduced shipment volumes and falling commodity prices.
- DE is counting on a replacement cycle to drive growth. New technology in tractors and harvesters promises better yields and efficiency, but demand is hindered by low farming incomes and high interest rates.
- The company does not foresee a turnaround in FY25, predicting a 30% decline in the large ag industry, leading to a 15% drop in net sales for Production & Precision Agriculture. Small Agriculture and Turf, which experienced a 25% sales drop in Q3 to $2.3 billion, is expected to see a 10% decline in net sales.
- DE anticipates FY25 net income of $5.0-$5.50 billion, marking a 26% year-over-year decline at the midpoint, below analysts' expectations.
- If interest rates decrease significantly in FY25, the farming equipment replacement cycle could gain momentum, benefiting the housing and construction markets as well. This potential has led the market to perceive DE's FY25 guidance as conservative, contributing to the stock's rally despite a negative outlook.
DE's strong earnings performance underscores its excellent execution amid a challenging downcycle with no immediate signs of improvement. Lower interest rates could eventually benefit DE significantly, but the timing remains uncertain as rates remain high even after Federal Reserve cuts.
