Deere is a company I profiled on February 2024, later releasing the in-depth report for free in May. Since then, the stock has appreciated 78% (vs 55% for the SPY). You can read the in-depth report for free here, and consider becoming a paid subscriber to have access to all in-depth reports (and much more!):
Deere reported good earnings yesterday, providing the market with a beat-beat-raise quarter driven by C&F (Construction and Forestry) and SAT (Small Ag & Turf). PPA (Production and Precision Ag) remained somewhat weak BUT received very interesting forward-looking commentary which was most likely behind the stock’s good performance. I don’t tend to think this is possible, but I believe it was possible to understand exactly what quote drove the stock reaction (more on this later):
Let’s start with some of the headlines (and I’ll try to be quick here as I don’t want to make this digest “boring”). As has been the case over the past few quarters, Construction (+18% YoY) and Small Ag and Turf (+12% YoY) continued their good performance, with muted performance from PPA (-6% YoY).
The strength in Construction is being driven by large-scale projects (please I beg you not to look at Caterpillar’s stock price, albeit Caterpillar also enjoys “power” exposure) which included data centers. Construction also had good visibility into FY 2027 and management expects the strength to persist.
Customer backlogs now extend well into fiscal year 2027, providing healthy visibility and optimism for next year.
Rental might be yet another potential demand driver for Construction going into next year. Deere’s construction segment has historically been present in rental operations (it’s table stakes in the construction industry), but management believes that dealers want to increase their exposure to rental (i.e., potentially cutting middlemen like United Rentals):
With respect to rental, we think there is an opportunity to further increase our exposure there. We participate both through our sales to the independent rental houses, but also our dealers participate in the market as well. We have also seen an increased appetite for some of them to invest in expanding their rental fleet and serving their customers even more in that space. It could help boost a little bit of the inventory fill that is to happen next year.
It’s worth noting that despite bouncing along the trough in some of its markets, Deere has managed inventories carefully. This has not only helped with margins and cash conversion but also positions the company to benefit from a “double tailwind” when markets recover (demand + inventory build-up).
The strength in SAT was driven by high-value crops and discretionary retail, although management did caution that visibility for this segment is not precisely high. Deere’s diversification is helping the company navigate the trough of the PPA segment while experiencing growth (I don’t think this has ever happened before). Diversification is something that one naturally believes is stupid when everything is moving upwards (I do anticipate we might hate Deere’s diversification when PPA turns around) but something that saves you when your most important segment turns south (also applicable to companies like Danaher).
The weakness in PPA was driven by South America (which is pretty volatile and might turn around fast) and Europe, with North America remaining somewhat stable (good news). Add all this up and we get to Deere trending towards the bottom end of its PPA guide, expecting sales down 10% this year. The good news is that management is also expecting double digits operating margins (11-12%).
The truth is that Deere is raising its net income and operating cash flow guide at a time when it is downgrading its PPA guide (i.e., there’s more to Deere than PPA and we are grateful when PPA does not do well). The guide also seems locked in with the company experiencing “strong fourth quarter order books across all segments:”
This strength at this point in the cycle is pretty much unprecedented for Deere and demonstrates that the company’s underlying margins have moved up over time (part of the investment thesis as the mix shifts to more technology-based and recurring revenue). Speaking about technology, there was pretty good news on the adoption front in Construction…
We are also seeing strong momentum across our technology portfolio. Installed smart grid adoption has increased more than 50% YTD. At the same time, sales of our jobsite safety solutions have increased nearly 40% YoY as customers increasingly invest in technologies that improve productivity, reduce reworks, and enhance safety across the jobsite.
Labor remains constrained and customers increasingly rely on technology to do more with less. Deere has a long track record of addressing those challenges in agriculture, and we are seeing similar momentum in construction now.
And also in PPA…
At the same time, current EOP trends suggest factory adoption of See & Spray will nearly double, with the technology included on about one third of North American sprayers on order. For model year 2027, we are seeing more than 40% of North American planters, including our next generation of advanced offerings such as Exact Rate and Exact Shot.
We have more than 520 million acres across nearly 1.2 million connected machines. Just as importantly, highly engaged acres have grown to more than 190 million acres, representing double digit growth for the year.
And what’s most interesting about this distribution is that Deere is already eyeing AI deployments across its user base…
We will soon build on that foundation with AI-enabled capabilities designed to unlock even more value from the data within Operations Center, where we have today more than 450,000 unique active monthly digital users.
Deere’s tech/equipment operations experience interesting dynamics, because what’s making equipment operations “suffer” (high input prices like those of fertilizers) is likely also behind the strong technological adoption. Management claimed that “farmers are reacting and looking for alternatives” and one of said alternatives is definitely technology.
PPA also brought THE quote that likely caused the stock to rise considerably, related to the company’s early order programs. Management shared the following:
We are seeing modest improvement in order intake versus the prior year. Even though the early order programs are still open, the collective orders for planters and sprayers are already higher than last year at this time.
Results are up mid-single digits compared to the completion of last year’s program, and we’ll provide an update next quarter after they’ve both closed over.
This basically means that this year’s uncompleted EOPs are up MSDs when compared to last year’s completed EOPs (so not apples to apples, which makes the growth more impressive). This is ahead of market expectations, but I believe there are certain caveats. First things first, this is very positive in the sense that it’s encouraging and supports that FY 2026 might indeed be the trough of the PPA cycle (hopefully this time it’s true). One caution I’d make is that even though MSD growth is “locked-in” for EOPs, it doesn’t necessarily mean that growth will accelerate as they close, as EOP demand might have been pulled forward this year. Nevertheless, it’s definitely great news.
So, all in all, pretty encouraging earnings from Deere even though we continue to wait for the inflection in PPA (which management believes will happen in FY 2027). With Deere sitting somewhat close to ATH’s, is the stock at a fair valuation?