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While facing stiff headwinds like lower farm incomes and dealer destocking, Deere (DE) crushed analysts' muted 2Q25 EPS expectations, driven by effective cost management, lower production costs, and favorable price realization across segments. Although revenue dropped 18% yr/yr to $11.17 bln, due to lower shipment volumes, reflecting weaker demand in farming and construction markets, the decline was less severe than anticipated and marked an improvement relative to the past three quarters.

The sizable EPS beat, and stabilizing sales are encouraging signs -- especially after competitor AGCO (AGCO) delivered a beat-and-raise earnings report on May 1 -- but DE also reduced the low end of its FY25 net income guidance to $4.75 bln from $5.0 bln (high end remained at $5.5 bln). This adjustment reflects caution about the persistence of challenging market conditions, and aligns with DE's industry outlook for FY25, which anticipates a decline of about 30% for large ag and a decline of roughly 10-15% for small ag & turf.

• The Production & Precision Agriculture segment, which caters to farmers, manufacturing combines, loaders, and large-size tractors, generated net sales of $5.23 bln, down 21% yr/yr, driven by lower shipment volumes. While operating margin contracted by 310 bps yr/yr to 22.0%, on a qtr/qtr basis, operating margin improved significantly, rising from 11.0% in 1Q25. This sequential improvement was fueled by lower production costs, reduced SA&G expenses, and better price realization, which partially offset the negative impact of sales mix and currency effects.
• Small Agriculture & Turf delivered net sales of $2.99 bln, a 6% yr/yr decline, marking a major improvement from recent quarters. For context, in Q1, net sales for this segment had declined by 28% year-over-year. The improvement in Q2 was driven by better price realization and a more favorable sales mix, partially offsetting the impact of lower shipment volumes. Notably, this segment was the only one to see its operating margin improve on a yr/yr basis, rising to 19.2% from 17.9% in 2Q24. The margin expansion was fueled by lower production costs, reduced warranty expenses, and effective price realization.
• Meanwhile, Construction & Forestry experienced a steep revenue decline of 23% yr/yr, with Q2 net sales totaling $2.95 bln. This segment has continued to lag behind others, primarily due to lower shipment volumes, which reflect weaker demand in both construction and forestry markets, driven by economic fluctuations and higher interest rates. While the segment's operating margin improved substantially on a  qtr/qtr basis -- from 3.3% in Q1 to 12.9% in Q2 -- this was still significantly below the 17.4% margin reported in the year-earlier period.

DE's Q2 earnings report presents a mixed picture of resilience and caution amid a challenging environment for the agricultural and construction equipment sector. Despite DE's cautious tone, as illustrated by its reduced FY25 net income guidance, the blowout EPS result and the relatively improved sales performance in Q2 suggest emerging green shoots, particularly in the Small Agriculture & Turf segment, which could provide a buffer against broader industry headwinds.