Deere drops 6% as the expected cyclical slowdown unfolds

Deere & Company (DE) reported fiscal Q1 2025 earnings that came in above consensus estimates on both revenue and EPS, but the results reflected significant declines across its key business segments. Net income dropped 50% year-over-year to $869 million, or $3.19 per share, beating estimates of $3.11. Revenue fell 30% to $8.51 billion, surpassing the expected $7.89 billion. The sharp decline was attributed to lower shipment volumes across agriculture and construction equipment, confirming the anticipated cyclical downturn. Despite the revenue and earnings beat, shares fell over 6% premarket, signaling that investors remain concerned about demand weakness and margin pressures.

The production and precision agriculture segment, a key driver of Deere’s profitability, saw net sales plummet 37% year-over-year to $3.07 billion, missing the $3.48 billion estimate. Operating profit in the segment declined 68% to $338 million, with margins contracting from 21.6% last year to just 11%. This reflects continued destocking pressures in North American high-horsepower equipment, which Deere had flagged as a challenge heading into the quarter. Small agriculture and turf sales also dropped 28% to $1.75 billion, while operating profit fell 62%. Construction and forestry, another major business unit, fared even worse with sales plunging 38% and operating profit collapsing 89% as demand slowed and price realization turned unfavorable.

Margins across all segments were weaker than expected, reinforcing concerns about a trough in the equipment cycle. The production and precision ag segment saw margins of just 11%, below the 13.8% consensus. Small ag and turf margins dropped to 7.1% from 13.4% last year, and construction and forestry margins fell to a mere 3.3%, significantly below the 8.4% estimate. Management emphasized efforts to optimize inventory levels in both new and used equipment, which will remain a focus through the first half of the year. However, the weak profitability profile suggests that the destocking phase still has room to run.

Deere reaffirmed its full-year net income guidance of $5.0 billion to $5.5 billion, maintaining prior expectations for segment sales declines. Production and precision ag sales are forecasted to decline 15-20%, small ag and turf sales are expected to fall 10%, and construction and forestry sales are projected to drop 10-15%. This suggests that management still sees significant challenges ahead but believes it has set achievable targets that provide room for upward revisions should conditions improve. While the guidance stability offers some reassurance, it does not yet indicate a firm inflection toward recovery.

Market reaction has been notably negative, with shares down over 6% premarket, signaling skepticism about Deere’s ability to navigate the downturn. The 50-day moving average ($447) looms as a key support level for investors to track.

Analysts had been cautiously optimistic that the worst of the cycle was priced in, with firms like Oppenheimer expecting earnings momentum to turn positive in FY2025. However, the weaker-than-expected margins and continued demand headwinds challenge this thesis. The performance of peers like Caterpillar (CAT), AGCO (AGCO), and CNH Industrial (CNHI) will be closely watched, as they could offer additional clues on the broader industry trajectory.

One area of potential optimism is Deere’s continued focus on technology and automation, particularly its Gen 2 autonomous tech stack unveiled at CES 2025. Management remains committed to its strategic shift toward precision agriculture and automation, which could provide a long-term growth driver once cyclical pressures ease. However, with the current market narrative dominated by demand weakness and margin compression, these advancements are unlikely to be a near-term catalyst for the stock.

In terms of valuation, Deere shares had already rebounded somewhat in early 2025, reflecting expectations that the downturn was largely priced in. However, today’s post-earnings drop suggests investors are reassessing the pace of recovery. With the stock trading lower, further multiple compression may be needed before buyers step back in. If destocking pressures persist beyond the first half of the year, the stock could face continued headwinds. The coming quarters will be critical in determining whether DE’s execution on cost management and inventory optimization is enough to stabilize profitability ahead of an eventual cyclical upturn.