Deere & Company (DE)

Executive Summary / Key Takeaways

• Deere's Smart Industrial strategy is delivering demonstrably higher cycle-over-cycle performance, with FY2025 equipment operating margins of 12.6% despite Production and Precision Agriculture (PPA) sales declining 24%—a structural improvement that redefines trough earnings power and supports higher valuation multiples through downturns.

• Technology moat expansion beyond core agriculture is accelerating, with the John Deere Operations Center now covering 500 million engaged acres across road building, earthmoving, and turf, while precision technologies like See & Spray (5 million acres) and harvest automation (90% take rate) create measurable customer value that sustains pricing power.

• Tariff headwinds will intensify to $1.2 billion in FY2026, but management's ability to maintain price-cost positivity demonstrates that customers recognize differentiated value, though this represents a critical test of the company's pricing authority and cost mitigation execution.

• Inventory discipline and lean production planning have positioned Deere to align production with retail demand in 2026, generating $5.1 billion in equipment operations cash flow while maintaining flexibility to capture upside when the cycle inflects, particularly in Construction & Forestry where Q4 sales surged 27%.

• Fiscal 2026 guidance anticipates the bottom of the North American large ag cycle, with PPA margins troughing at 11-13% on 5-10% lower sales, creating potential earnings leverage of 60% decremental margins that could reverse dramatically when farm fundamentals improve.

Setting the Scene: From Steel to Software

Deere & Company, founded in 1837 by blacksmith John Deere in Grand Detour, Illinois, has spent nearly two centuries building what is now the world's premier agricultural and construction equipment franchise. What began as a better plow has evolved into a global manufacturing and distribution empire spanning agricultural, turf, construction, and forestry equipment. This historical evolution explains how a company forged in the physical world is now executing one of the most ambitious technology transformations in industrial history.

The strategic inflection point arrived in 2020 with the launch of the "Smart Industrial" operating model, a deliberate pivot to integrate advanced technology with premium equipment. This wasn't merely adding GPS to tractors; it was a fundamental reimagining of how Deere creates value. The strategy aims to enhance customer productivity, profitability, and sustainability while diversifying profitability across all business segments and geographies. This diversification directly addresses Deere's historical Achilles' heel: heavy reliance on North American large agriculture, which amplified cyclical volatility and compressed valuations during downturns.

Deere's business model today operates through four segments that serve distinct but increasingly interconnected markets. Production and Precision Agriculture (PPA) focuses on large agricultural equipment and technology solutions for row-crop farmers. Small Agriculture and Turf (SAT) serves dairy, livestock, and turf care markets. Construction and Forestry (CF) addresses earthmoving, compact construction, and forestry equipment. Financial Services (FS) provides captive financing that lubricates equipment sales while generating attractive returns. This segment mix creates cross-selling opportunities and reduces correlation across economic cycles—when large ag struggles, construction might recover, and vice versa.

The company sits atop an industry structure characterized by high capital intensity, long replacement cycles, and increasing technology integration. Deere's primary competitors—AGCO Corporation (AGCO), CNH Industrial (CNHI), Caterpillar (CAT), and Kubota (KUBTY)—each present different threats. AGCO competes in mid-size tractors through brands like Fendt but lacks Deere's scale and proprietary technology stack. CNH trails in North American large ag and relies more on partnerships than internal R&D. Caterpillar dominates pure construction but has minimal ag exposure, while Kubota specializes in compact equipment where Deere is building technology differentiation. This competitive landscape highlights Deere's unique position: the only player with leadership in large ag, a growing technology moat, and sufficient scale to invest through cycles.

Technology, Products, and Strategic Differentiation: The Precision Moat

Deere's technology strategy centers on amplifying leverage across nearly all production systems, a shift that became particularly evident in fiscal 2025. The John Deere Operations Center, the digital nerve center of the Smart Industrial strategy, expanded beyond traditional agriculture into road building, earthmoving, golf, and turf. This expansion transforms a platform built for 500 million engaged acres into a universal operating system for mobile equipment, creating network effects that competitors cannot easily replicate. The 10% increase in engaged acres and 17% rise in highly engaged acres to 147 million demonstrates accelerating adoption.

The connectivity layer saw a breakthrough with JDLink Boost, a Starlink-enabled satellite connectivity solution that launched in January 2025 in Brazil and the U.S. and expanded globally over the summer. With over 8,000 orders, this solves the fundamental connectivity challenge in remote operations, enabling real-time data transmission that powers automation and fleet management. This isn't just a feature—it's the infrastructure that makes autonomy possible.

Precision Essentials, a retrofit kit bringing core precision technology to older equipment, has attracted over 24,000 orders in two years, bringing 3,300 new organizations into the Operations Center. This expands Deere's addressable market beyond new equipment sales, creating a recurring revenue stream from the installed base while building switching costs. Once a farmer integrates their legacy fleet into Deere's digital ecosystem, migrating to a competitor becomes prohibitively expensive and operationally risky.

The autonomy roadmap shows tangible progress. Deere began taking orders for its autonomous row-crop tillage solution for spring delivery, while harvest settings automation achieved a 90% take rate on North American combines, covering over 5 million acres. Predictive ground speed automation delivered a 30% throughput increase measured in bushels per hour. See & Spray technology, which reduces herbicide usage by approximately 50%, covered over 5 million acres in 2025 after just 1 million in 2024. These metrics quantify the productivity gains that justify premium pricing. When a technology can cut input costs in half while increasing throughput by nearly a third, customers will pay for it even in a downturn.

The technology moat extends beyond agriculture. Wirtgen's integration brought the Operations Center to road building in 2025, benefiting over 3,200 customer organizations. This cross-pollination leverages R&D investments across segments, improving returns on technology spending while creating a unified platform that competitors cannot match. AGCO and CNH lack this breadth; Caterpillar has construction scale but no ag platform to leverage.

Financial Performance & Segment Dynamics: Margin Resilience as Proof of Concept

Deere's FY2025 results provide compelling evidence that the Smart Industrial strategy is structurally enhancing earnings power. Despite net sales declining 12% to $45.7 billion and equipment sales falling 13% to $38.9 billion, the company delivered equipment operating margins of 12.6% and net income of $5 billion ($18.50 per share). This performance demonstrates that Deere can maintain profitability through a severe cyclical downturn, a stark contrast to historical patterns where margins collapsed during ag recessions.

The segment performance reveals the diversification benefit in action. PPA, Deere's largest and most profitable segment, saw nine-month sales decline 24% to $12.6 billion while operating margins compressed to 16.4% from higher levels. The implied decremental margin of around 60% is painful but manageable, and management notes that excluding tariffs, it's in the low to mid-50s. This shows disciplined cost management—lower production costs from reduced material costs and lower employee profit-sharing incentives partially offset volume deleverage. The full-year margin guidance of 15.5-17% for PPA, despite the sales decline, proves that technology pricing and cost actions are providing a buffer.

Small Agriculture and Turf demonstrated remarkable resilience, with nine-month sales down only 10% to $7.8 billion and operating margins of 15.2%. The fourth quarter showed particular strength, with sales up 7% and margins holding steady. This validates Deere's expansion into dairy, livestock, and turf markets that are less correlated with row-crop cycles. The segment's ability to maintain pricing power while large ag struggled shows that technology value propositions resonate across customer types.

Construction and Forestry faced the steepest challenges, with nine-month sales down 22% to $8.0 billion and operating margins compressing to 8.5%. However, the fourth quarter showed a dramatic inflection, with sales surging 27% and margins expanding to 10.3%. This suggests the inventory destocking phase is ending and the segment is positioned for growth in FY2026, when management forecasts 10% higher sales. The segment's recovery is critical to offsetting large ag weakness and demonstrates the benefit of Deere's 2020 acquisition of former Deere-Hitachi joint venture factories, which expanded manufacturing capabilities.

Financial Services generated $597 million in net income for the nine months, up 14% despite revenue declining 4% due to the deconsolidation of Banco John Deere. This shows improving credit quality—lower provision for credit losses offsetting less favorable financing spreads. The allowance for credit losses increased primarily due to higher expected losses on agriculture and turf accounts, but the overall trend suggests manageable credit risk even as farm economics deteriorate.

The balance sheet reflects disciplined capital allocation. Deere returned over $2.8 billion to shareholders via dividends and share repurchases in FY2025 while maintaining a mid-single-A credit rating. The pause in buybacks during Q4 due to market uncertainty signals prudent cash management, but management's expectation to resume normal capital allocation in 2026 indicates confidence in cash generation. Equipment operations cash flow of $5.1 billion was a significant improvement from past downturns, validating the company's proactive cycle management.

Outlook, Management Guidance, and Execution Risk

Deere's FY2026 guidance frames a pivotal year that management believes will mark the bottom of the North American large ag cycle. The company forecasts net income of $4.0-4.75 billion, a decline from FY2025's $5.0 billion that reflects both continued cyclical pressure and a projected $1.2 billion pretax direct tariff expense—double the 2025 level. This guidance explicitly quantifies the tariff headwind while assuming Deere can offset a significant portion through pricing and cost actions, a critical test of the Smart Industrial value proposition.

The segment outlook reveals a strategic inflection. PPA sales are expected to decline 5-10% with operating margins of 11-13%, down from FY2025's 16.4% but still representing trough profitability well above historical lows. The implied midpoint guidance of approximately $16 in earnings per share reflects sub-trough conditions with projected sales at less than 80% of mid-cycle levels. This suggests that even at the bottom, Deere's earnings power has structurally improved, setting up significant operating leverage when the cycle turns.

SAT and CF are expected to grow sales around 10% each, with margins of 12.5-14% and 8-10% respectively. This divergence shows Deere's diversification strategy is working—growth segments are offsetting the large ag decline, smoothing earnings volatility. The CF segment's recovery is particularly important, as it demonstrates that the inventory correction in earthmoving equipment is complete and the business can grow in line with retail demand.

Management's production planning philosophy for FY2026 reveals a disciplined approach to cycle management. Deere intends to start the year with lean production for North American large ag, limiting seasonal inventory builds to maintain flexibility. As Deanna Kovar explained, "we decided to limit production slots in the quarter for North America... we've given ourselves flexibility to adjust to demand in subsequent quarters." This prevents the inventory overhang that has plagued past cycles, reducing working capital drag and positioning Deere to respond quickly when demand recovers.

The tariff mitigation strategy is multifaceted. Deere is certifying products for USMCA exemptions, optimizing global trade flows by moving component sourcing where "no regret solutions" are identified, and implementing price increases for model year 2026. Josh Jepsen stated, "we expect to be price cost positive" in 2026, capturing "a good chunk" of tariff exposure. This tests whether Deere's technology differentiation truly translates to pricing power or if competitive pressures force margin absorption.

Key execution risks center on technology adoption rates, commodity price recovery, and the timing of the ag cycle inflection. The company's assumption that 2026 marks the bottom depends on farm fundamentals stabilizing—U.S. corn and soy consumption remaining strong, biofuel demand growing, and used equipment inventories continuing to decline. If these conditions don't materialize, Deere may face another year of large ag decline, further pressuring margins and testing investor patience.

Risks and Asymmetries: What Could Break the Thesis

The most immediate risk is tariff escalation beyond the projected $1.2 billion. The August 2025 expansion of steel and aluminum derivative duties to additional Harmonized Tariff Schedule codes demonstrates how trade policy can change quickly. If the scope or rates increase further, Deere's ability to offset through pricing could be overwhelmed, particularly if competitors absorb costs to gain share. This could compress margins below the guided 11-13% for PPA, potentially breaking the thesis that technology value protects profitability.

The FTC lawsuit filed in January 2025, alleging monopolization and unfair competition related to equipment repair access, represents a structural threat to Deere's business model. A ruling that forces Deere to open its diagnostic tools and software could erode the proprietary technology moat that justifies premium pricing. This attacks the closed-ecosystem advantage that underpins the Smart Industrial strategy's economics.

Commodity price weakness and farm income pressure remain fundamental risks. Row crop farmers face challenging fundamentals that pressure short-term liquidity, while high interest rates temper equipment demand. If these conditions persist beyond 2026, the cycle bottom could extend, delaying the earnings leverage that investors expect. The recent U.S.-China trade agreement creates uncertainty around Brazilian soybean exports, potentially impacting South American demand where Deere has invested heavily.

Technology adoption risk cuts both ways. While current metrics are strong, the pace of autonomy and precision ag adoption could slow if economic pressure forces farmers to delay capital expenditures. Conversely, faster-than-expected adoption could create upside as customers realize productivity gains that justify investment even in a downturn. The 90% take rate on harvest automation and 30% throughput improvement from predictive ground speed show clear value, but scaling these solutions across the entire fleet takes time.

The competitive landscape could shift if AGCO or CNHI accelerate their precision ag partnerships or if autonomous startups achieve breakthroughs that bypass traditional equipment. However, Deere's integrated approach—combining hardware, software, and financing—creates switching costs that pure-play technology companies cannot easily overcome. The 24,000 Precision Essentials orders demonstrate that even retrofit solutions build ecosystem lock-in.

Competitive Context: The Technology Moat in Numbers

Deere's competitive positioning becomes clear when comparing financial metrics across peers. Deere's FY2025 operating margin of 12.6% significantly exceeds AGCO's 6.3% and CNHI's ag segment margins, which have compressed to the mid-teens. This margin advantage demonstrates that Deere's technology premium translates to pricing power that competitors cannot match. While AGCO and CNHI compete on value pricing, Deere commands premium prices for demonstrable productivity gains.

In construction, Caterpillar's 17.8% operating margin exceeds Deere's 8.5% CF margin, reflecting CAT's superior scale and product breadth. However, Deere's Q4 CF margin of 10.3% and forecasted 8-10% for FY2026 show narrowing gaps as the segment recovers. This suggests Deere's technology integration—bringing precision capabilities from ag to earthmoving—is creating differentiation that can support margin expansion even against a larger competitor.

The technology gap is stark. Deere's Operations Center covers 500 million acres with proprietary data analytics, while competitors rely on third-party partnerships. AGCO's Trimble (TRMB) JV and CNHI's tech partnerships offer flexibility but lack the integrated ecosystem that drives Deere's 134% net dollar retention equivalent in precision ag. Integrated solutions create higher switching costs and enable Deere to capture value across the entire customer workflow, from planning to execution.

Scale advantages manifest in R&D spending and manufacturing efficiency. Deere's $20 billion commitment to U.S. manufacturing over the next decade—including a new excavator factory in North Carolina and expansions for See & Spray sprayers and X9 combines—dwarfs competitors' investment plans. This ensures Deere can meet demand when the cycle turns while maintaining cost competitiveness through automation and vertical integration.

Valuation Context: Pricing a Transformed Business

At $464.49 per share, Deere trades at 25.1 times trailing earnings and 20.95 times forward earnings, a modest premium to AGCO's 21.1x and CNHI's 19.7x but a discount to Caterpillar's 29.6x. This valuation suggests the market has not yet fully recognized the structural improvement in Deere's earnings power. The price-to-operating cash flow ratio of 14.68x is attractive relative to the company's cash generation capability and dividend yield of 1.40%.

Deere's enterprise value of $182.94 billion and EV/EBITDA of 20.95x reflect the market's expectation of cyclical recovery. The debt-to-equity ratio of 2.46x is manageable for an asset-intensive business and supports the company's ability to invest through downturns. This shows Deere can maintain its technology investment pace even when sales decline, preserving the long-term competitive moat.

The key valuation question is whether Deere deserves a higher multiple to reflect its technology transformation. The company's return on equity of 20.43% and return on assets of 3.81% demonstrate efficient capital deployment, while the 35.03% payout ratio shows commitment to shareholder returns. If Deere can demonstrate that Smart Industrial has permanently reduced earnings volatility, a higher multiple would be justified, suggesting potential upside beyond cyclical recovery.

Conclusion: The Bottom of the Cycle Meets a Structural Upgrade

Deere's FY2025 performance and FY2026 guidance tell a story of a company that has fundamentally improved its earnings power while navigating a severe cyclical downturn. The Smart Industrial strategy's success is evident in 12.6% equipment margins despite a 24% decline in PPA sales, technology adoption metrics that demonstrate clear customer value, and cash flow generation that supports both investment and shareholder returns. This suggests Deere's trough earnings are structurally higher than historical cycles, supporting a higher valuation baseline.

The confluence of factors heading into 2026 creates a compelling risk/reward asymmetry. Management's conviction that large ag will bottom, combined with lean inventory levels and production flexibility, positions Deere to capture significant operating leverage when demand recovers. The technology moat—embodied in 500 million engaged acres, proprietary autonomy solutions, and integrated financing—provides pricing power that competitors cannot match, as evidenced by the ability to offset tariff headwinds while maintaining margins.

The critical variables for investors to monitor are the pace of technology adoption, the effectiveness of tariff mitigation, and the timing of the ag cycle inflection. If Deere executes on these fronts, the stock's current valuation likely underestimates the earnings power of a transformed business. The combination of higher trough margins, technology-driven revenue diversification, and operational leverage at the cycle bottom creates a compelling thesis that extends beyond traditional cyclical recovery into structural business model improvement.