In This Article:
Key Points
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Deere is working through a downturn in demand for its equipment in almost every end market and geography.
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Sales and earnings are down, but the company continues to deliver solid operating results.
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Management expanded the lower end of its full-year earnings outlook, but held firm on cash flows and the upper end of profits.
Here's our initial take on Deere & Co.'s (NYSE: DE) fiscal 2025 second-quarter financial results.
Key Metrics
| Metric | Q2 FY24 | Q2 FY25 | Change | vs. Expectations |
|---|---|---|---|---|
| Revenue | $15.2 billion | $12.8 billion | -16% | Beat |
| Earnings per share | $8.53 | $6.64 | -22% | Beat |
| Operating margin | 20.3% | 18.1% | - 220 bps | n/a |
| Operating cash flow (six months) | $944 million | $568 million | -40% | n/a |
Making the Most of a Not-Great Situation
The equipment and engine manufacturer's second quarter saw more double-digit sales declines, and as is typical for many cyclical businesses, it reported an even larger earnings decline. Yet some signs indicated the worst of this cyclical downturn could be behind it. While revenue was down 16% and earnings per share fell 22%, that was a moderation from the 30% and 49% respective declines in the first quarter, which was a deterioration from the fourth quarter of the prior year, when revenue fell 28% and earnings per share were down 45%.
In profitability and cash flow terms, manufacturers typically see their margins shrink during periods of weak demand, and that's been the case for Deere. The good news is that gross margins are holding up, at 40.3% from 39.9% last year. Operating margin did fall 220 basis points (2.2 percentage points) to 18.1%, a relatively solid result considering the impact of lost revenue. In all, Deere was able to bring its costs and expenses down almost $1.7 billion in the quarter.
Immediate Market Reaction
Deere share prices were up around 2.3% in premarket trading today, a notable gain against a backdrop of broad market futures down about a half a percentage point. Deere's results, while worse than a year ago, show that trend of stabilization and came in ahead of expectations. Management's guidance across most of its segments is for revenue declines to stabilize and Deere to deliver strong full-year earnings and cash flow.
What to Watch
Deere is guiding for revenue to fall 15% to 20% in its production and precision ag segment, which is its largest, but for 10% to 15% declines in its other segments, which make up about 60% of total sales. This supports the likelihood that even with continued soft sales, the trend suggests it's at the bottom of the cycle and showing some signs of a recovery in growing demand within a few quarters.