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Following concerning Q2 results from AGCO (AGCO) and soft construction numbers from Caterpillar (CAT) recently, Deere's (DE) relatively weak Q3 (Jul) performance was better than the market feared, triggering a solid move higher today. Deere did topple earnings and sales estimates in the quarter, continuing to crush on its bottom line as it reigns in expenses. However, sales still fell yr/yr. Management also commented that Ag fundamentals remain muted, and demand in Construction & Forestry has tempered, culminating in another quarter of challenging market conditions.

The stubbornly deflating economic environment has spurred Deere to take further cost-reduction actions and better align its rest-of-year production schedules to target lower year-end inventory levels. Deere's moves mirror those taken by AGCO, which is rapidly cutting production to right-size dealer inventories in hopes that demand becomes more balanced in 2025. The result of Deere's actions is a full order book across all segments for the remainder of FY24 (Oct).

• In Q3, all core business lines recorded yr/yr sales drops, with the sharpest contraction occurring in Production & Precision Ag, which endured a 25% decline. Lower shipment volumes were the culprit, partially offset by price realization. The tumbling sales clipped operating profits, which plunged by 35% yr/yr.
• Small Ag & Turf and Construction & Forestry performed moderately better, registering 18% and 13% revenue declines, respectively. However, operating profits, and subsequently margins, across these segments slipped by a similar degree as Production and Precision Ag.
  • Small Ag & Turf is suffering from a lackluster macroeconomic environment. Commodity prices play a key role in quarterly performance, making a global rebuilding of grain stocks an issue as it hikes supply and lowers prices. Meanwhile, elevated interest rates and geopolitical uncertainty continue to weigh on purchase decisions, which is trickling into all end markets.
  • In Construction & Forestry, U.S. government spending has provided some assistance, but not enough to offset a sequential slowdown in single-family housing starts that is compounded by a continued decline in multi-family housing starts and persistent problems in the commercial real estate market. Deere's commentary is similar to Caterpillar's. However, Caterpillar mentioned that residential sales to North American customers climbed, reflecting healthy demand for new housing.
• Looking ahead, Deere does not anticipate conditions strengthening in the near term. Most of its FY24 growth targets remained unchanged, while a few worsened. The company forecasts the same yr/yr declines across Production & Precision Ag and Small Ag & Turf, around 20-25%. Conversely, Deere expects construction equipment in the U.S. and Canada to fall 5-10% compared to down 5% to flat. As a result, its overall net sales outlook for this segment changed to down 10-15% from down 5-10%.

Market conditions remain unfavorable, and there are a few signs things will turn around soon. However, given peer's recent results and comments, investors are not surprised by this. Instead, they are seeing the glass half full, commending Deere's initiatives to better align production with demand, which should position it better to respond effectively once the market turns.