Precision Farming Advances Will Drive Cycle Recovery Despite Headwinds

Key Takeaways

• Analysts expect Deere to keep building on precision agriculture and digital tools as important contributors to equipment and software related revenue over time.
• The main factor that has to go right is that farmers, contractors, and dealers continue to adopt Deere’s higher tech offerings across agriculture and construction so that the company can use its installed base and digital ecosystem more fully.
• The current valuation, which this narrative views as fairly valued and bullish, suggests that the market already prices in Deere’s ability to balance construction growth, a potential future agriculture cycle recovery, and ongoing tariff and labor pressures without a major impact on long term profitability.

What Deere Does

Deere & Company manufactures and distributes agriculture, turf, construction, and forestry equipment worldwide. It also provides financing, leasing, and related services to farmers, contractors, and equipment dealers.

Catalysts

What are the underlying business or industry changes driving this perspective?

• Rapid adoption of Deere precision agriculture and automation solutions, now evidenced by See & Spray covering significantly more acres with herbicide savings of over 50% and higher technology take rates on 2027 sprayers and planters, supports the earlier view that higher value equipment and software engagement can lift future revenue and net margins through a larger mix of technology rich offerings.
• Expansion of Deere’s digital ecosystem, with more than 520 million engaged acres, nearly 1.2 million connected machines and over 450,000 monthly active users in John Deere Operations Center, builds on the prior focus on software and data services and points to a growing base for recurring revenue and potentially higher earnings from digital tools layered on the installed equipment fleet.
• Structural reductions in dealer and channel inventories for North American large agriculture equipment, including more than 50% lower new high horsepower tractor and combine inventories and nearly 40% lower late model used tractor units year over year, reinforce the earlier claim around leaner “build to retail” operations that can support better production efficiency, pricing discipline and net margins when demand improves.
• Continued growth in Deere’s Construction & Forestry segment, with 2026 net sales guided to be up about 20% and order books largely full into fiscal 2027, supports the idea of a second earnings engine alongside agriculture and points to a broader revenue mix and more stable consolidated earnings as infrastructure, data center and energy related demand flows through future periods.
• Execution on Deere’s long term U.S. manufacturing investment, including the start of Deere designed excavator production in the expanded Kernersville, North Carolina facility and a plan for US$20b of U.S. manufacturing spending over 10 years, underpins capacity and cost initiatives that can influence future production efficiency, equipment margins and cash generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Deere's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 20.9% in 3 years time.
• Analysts expect earnings to reach $10.2 billion (and earnings per share of $34.05) by about September 2029, up from $4.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.0 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 23.5x on those 2029 earnings, down from 37.8x today. This future PE is lower than the current PE for the US Machinery industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.24%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Tariff costs remain high, with direct expenses of about US$1.1b in fiscal 2026 and net tariff costs projected to be about US$1b in 2027 after earlier refunds. If Deere cannot keep offsetting these through pricing or efficiency, this continuing 3 point margin headwind could pressure operating margins and earnings and lead the share price to fall rather than remain stable.
• Large agriculture markets are under cyclical pressure, with Production & Precision Ag net sales expected to be down about 10% in 2026 and industry large ag sales in the U.S. and Canada expected to decline 15% to 20%. If muted farm profitability and high input costs persist longer than expected, revenue and earnings could stay under pressure and challenge the idea that Deere’s share price holds its ground.
• South American agriculture remains weak, with tractor and combine industry outlook in the region revised to a decline of 15% to 20% and Deere underproducing retail demand as fertilizer costs and interest rates weigh on farm economics. A prolonged slump or further deterioration in this market could drag on segment revenue and net margins and pull the overall share price below the current range.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $688.44 for Deere based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $813.18, and the most bearish reporting a price target of just $500.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $48.8 billion, earnings will come to $10.2 billion, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 9.2%.
• Given the current share price of $683.99, the analyst price target of $688.44 is 0.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.