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Deere (DE) is in the green today after the ag and lawn equipment maker reported 4Q24 earnings that easily surpassed analysts' subdued expectations, even as revenue plunged by nearly 33% yr/yr to $9.28 bln. Tight cost controls and lower production costs due to easing inflationary pressures led to the sizable EPS beat, which came on the heels of downside earnings reports from peers CNH Industrial (CNH) and AGCO Corp. (AGCO) on November 7 and November 5, respectively. 

The soft results from CNH and AGCO lowered the bar for DE, but the three earnings reports taken together still paint a rather bleak picture for the U.S. farming industry. 

• In each of DE's three business units -- Production & Precision Agriculture, Small Agriculture & Turf, and Construction & Forestry -- revenue declined by significant double-digit rates. For Production & Precision Agriculture, DE's largest business that sells combines and large tractors, revenue dove by 38% yr/yr to $4.3 bln as shipment volumes fell sharply. Falling commodity prices, and the associated drop in farmer incomes, sparked a downcycle for the ag equipment industry that has yet to show signs of breaking.
• DE is banking on a replacement cycle to help reignite its growth. New software and technology within tractors and harvesters drive better yields and improve efficiency, but lower farming incomes and persistently high interest rates have so far stunted demand for this new equipment.
• The company isn't expecting a turnaround to materialize in FY25, either. For the large ag industry, DE is forecasting another 30% decline in FY25, leading to an estimated 15% drop in net sales for Production & Precision Agriculture. For Small Agriculture and Turf, which saw sales dive by 25% in Q3 to $2.3 bln, the news is only slightly better with DE guiding for a 10% decrease in net sales.
• As a result of this downbeat demand outlook for FY25, DE is expecting FY25 net income of $5.0-$5.50 bln, reflecting a yr/yr decline of 26% at the midpoint, and missing analysts' expectations. 
• However, if interest rates do turn meaningfully lower in FY25, as anticipated, then that farming equipment replacement cycle could get kick-started, while activity in the housing and construction markets also receive a boost. On that note, we believe that the market may be viewing DE's FY25 guidance as overly conservative, explaining why the stock is rallying in the face of a downbeat outlook.

DE's sizable earnings beat highlights the company's top-tier execution amid a steep downcycle that has shown no signs of reversing any time soon. Once the impact of lower interest rates does trickle through the economy, though, DE stands to be a major beneficiary. The only question is when exactly that will happen as interest rates have stayed stubbornly high, even after two rounds of rate cuts from the Federal Reserve.