Executive Summary / Key Takeaways

• Deere is navigating a significant cyclical downturn in its core agricultural and construction markets, driven by factors including lower commodity prices, high interest rates, and trade uncertainty, resulting in substantial year-over-year declines in sales and net income in the first half of fiscal 2025.
• Despite the challenging backdrop, the company is demonstrating enhanced operational resilience through proactive inventory management (underproduction), disciplined cost controls, and favorable production costs, leading to structurally better margins at expected sub-trough sales levels compared to previous downturns.
• Deere's strategic focus on technology, particularly precision agriculture and autonomy, is a key differentiator, driving customer value through quantifiable efficiency gains (e.g., See & Spray herbicide savings, increased harvest productivity) and expanding digital engagement, positioning the company for long-term growth beyond the current cycle.
• Near-term outlook for fiscal year 2025 anticipates continued market contraction, with Net Income guidance widened to $4.75 billion - $5.5 billion, impacted significantly by over $500 million in forecasted pre-tax tariff costs, particularly affecting the Construction & Forestry segment.
• Key factors for investors to monitor include the pace of used inventory reduction, the impact of trade policies and tariffs, the resolution of legal challenges (like the FTC antitrust lawsuit), and the continued adoption and monetization of the company's advanced technology solutions.

A Legacy Forged in Steel, Focused on the Digital Field

For nearly two centuries, Deere & Company has been synonymous with the machinery that feeds and builds the world. From its origins in a blacksmith shop in Grand Detour, Illinois, the company has evolved from crafting steel plows to pioneering precision agriculture and autonomous solutions. This deep history in manufacturing excellence and close ties to the land forms the bedrock of its current strategy.

Today, Deere operates through four primary segments: Production and Precision Agriculture (PPA), Small Agriculture and Turf (SAT), Construction and Forestry (CF), and Financial Services (FS). This diversified yet focused portfolio serves global markets, providing essential equipment and the financing required for operations ranging from vast grain fields to urban construction sites and residential landscapes.

The company's strategic direction is firmly rooted in its Smart Industrial Operating Model and Leap Ambitions, introduced in 2020. This framework represents a deliberate pivot towards integrating advanced technology with traditional hardware, focusing on entire production systems and leveraging a centralized tech stack. The goal is clear: to make customers more productive, profitable, and sustainable, thereby creating differentiated value and strengthening Deere's competitive position.

The Technological Edge: Precision, Autonomy, and Connectivity

At the heart of Deere's investment thesis lies its differentiated technology. This isn't just about building robust machines; it's about embedding intelligence that delivers tangible, quantifiable benefits to the customer. The company's three-decade journey in developing its technology stack is now yielding results across its portfolio.

In precision agriculture, solutions like See & Spray exemplify this advantage. This technology enables targeted herbicide application, with early results showing average herbicide use reductions of nearly 60%. This translates directly into lower input costs for farmers, enhancing profitability. Similarly, advanced harvest settings automation on combines is expected to boost harvest productivity by up to 20%. These aren't incremental improvements; they are step-function changes in operational efficiency.

The adoption of these technologies is gaining traction. The Precision Ag Essentials kit, which provides foundational guidance, connectivity, and onboard compute capabilities, saw over 8,000 units sold in its first year (FY24) and is being installed on older equipment (average 2012 model year), bringing more customers into the digital ecosystem. In the first half of FY25, over 10,000 orders for Precision Essentials kits were received globally, exceeding the entire FY24 order count in just six months. The company is also seeing strong early renewal rates (nearly two-thirds towards a 70% goal) for the first cohort of Precision Essentials licenses, indicating perceived value. Engaged acres on the John Deere Operations Center grew by nearly 15% year-over-year to over 475 million acres by Q2 FY25, with highly engaged acres (deeper utilization) growing even faster at over 25%.

Autonomy is another critical frontier. Building on its CES 2022 reveal, Deere unveiled a new line of autonomous machines in January 2025, extending the technology beyond large agriculture to commercial landscaping and construction (articulated dump trucks). These solutions aim to address the skilled labor shortage facing these industries, enabling customers to do more work with less human input. The second-generation autonomy kit, featuring advanced computer vision and AI, is designed to operate safely in complex environments, with stated goals of increasing operational speed (e.g., 40% faster tillage operations with the 9RX tractor autonomy kit) and improving accuracy.

Connectivity is the backbone enabling these solutions. The full availability of the Starlink-enabled JDLink Boost solution in Brazil in early 2025 is a prime example, addressing the significant challenge of limited cell coverage in agricultural areas (estimated 70% of Brazilian ag land lacks sufficient coverage). Enhanced connectivity facilitates remote display access, allowing dealers to provide support without being physically present, a capability that saw 2.5 million sessions in 2024, an 85% increase from two years prior.

Deere continues to invest heavily in R&D, maintaining record levels of spending even during the downturn, to further develop these technologies and expand their application across product lines and geographies. This commitment to innovation, coupled with a focus on Solutions as a Service business models, positions Deere to capture recurring revenue streams and deepen customer relationships by delivering measurable outcomes.

Navigating the Downturn: Operational Discipline Meets Market Headwinds

Deere is currently operating in a challenging market environment. The first half of fiscal year 2025 saw significant declines in net sales and revenues, down 22% year-over-year to $21.272 billion, with net income attributable to Deere Company falling 35% to $2.673 billion. These declines were primarily driven by lower sales volumes across equipment segments and unfavorable foreign currency effects.

• Production and Precision Agriculture (PPA): Net sales were down 27% to $8.297 billion (6M FY25), with operating profit down 45% to $1.486 billion. Lower shipment volumes, unfavorable sales mix, and currency headwinds were partially offset by lower production costs and price realization.
• Small Agriculture and Turf (SAT): Net sales decreased 15% to $4.742 billion (6M FY25), with operating profit down 22% to $698 million. Lower shipment volumes and sales mix were partially offset by lower production costs and price realization.
• Construction and Forestry (CF): Net sales fell 30% to $4.941 billion (6M FY25), and operating profit plummeted 64% to $444 million. Lower shipment volumes, unfavorable sales mix, and negative price realization due to competitive pressures were the main drivers.
• Financial Services (FS): Revenues increased 3% to $2.856 billion (6M FY25), while net income rose 6% to $391 million. Excluding the impact of the Banco John Deere S.A. (BJD) deconsolidation, net income decreased due to a higher provision for credit losses and lower financing spreads, partially offset by lower expenses.

Despite these top-line pressures, Deere's operational execution has been a highlight. The company has proactively managed inventory levels, implementing planned underproduction in 2024 and continuing into 2025, particularly in North American large agriculture and construction equipment. This strategy aims to align production with moderating retail demand and reduce field inventory levels faster than in previous cycles. While this underproduction leads to higher overhead costs as a percentage of sales, the impact is being mitigated by favorable production costs stemming from reduced material and freight expenses, as well as disciplined control over selling, administrative, and general expenses (down 7% in 6M FY25).

The company's financial health remains robust, supported by strong cash and marketable securities balances ($9.263 billion at April 27, 2025) and access to global credit markets ($11.9 billion in worldwide lines of credit, $4.866 billion unused). The Financial Services segment, while facing higher credit loss provisions and less favorable financing spreads, maintains a strong credit rating essential for supporting customer purchases.

Competitive Landscape: Tech Moat vs. Market Pressures

Deere operates in highly competitive global markets. In agriculture, key rivals include AGCO (AGCO), CNH Industrial (CNHI), and regional players. In construction, major competitors include Caterpillar (CAT), Komatsu (KMTUY), Volvo Construction Equipment (VLVLY), and others like Terex (TEX) and Textron (TXT) in specific product lines.

Deere's primary competitive advantages lie in its strong brand reputation, extensive global dealer network, integrated financial services, and, increasingly, its leadership in precision technology. The dealer network provides unparalleled service and support, crucial for customer uptime, especially with complex modern machinery. John Deere Financial facilitates equipment purchases, enhancing sales volumes and customer loyalty.

However, the current market downturn has intensified competition. Lower demand and elevated used inventory levels in some segments (particularly North American large ag tractors and construction equipment) are leading to increased price competition and higher sales incentives. While Deere aims for positive price realization overall, pressures in certain markets, notably Construction & Forestry, have resulted in negative price realization in recent periods.

Compared to competitors like Caterpillar, which has a larger presence in heavy construction and mining, Deere's strength is more concentrated in agriculture and roadbuilding (via Wirtgen). While Caterpillar also invests in technology, Deere's integrated "Smart Industrial" approach and focus on production systems aim to create a deeper, more connected ecosystem for farmers. Against more specialized competitors like AGCO in agriculture or Terex in construction, Deere leverages its broader portfolio and technological depth. The acquisition of Sentera in May 2025 further enhances its precision ag capabilities, integrating aerial scouting into the John Deere Operations Center, a move aimed at maintaining a technological edge over rivals in the agtech space.

The ongoing FTC antitrust lawsuit regarding equipment repair is a notable competitive challenge, alleging monopolization by limiting access to repair tools. Deere is actively contesting this, while simultaneously expanding its self-repair resources, indicating a strategic response to regulatory and competitive pressures around serviceability.

Outlook and Risks: Navigating Uncertainty

Deere's outlook for fiscal year 2025 reflects the challenging market conditions. The company forecasts Net Income attributable to Deere Company in the range of $4.75 billion to $5.5 billion. This represents a widening of the previous guidance range, primarily driven by the anticipated impact of tariffs. Management expects a pre-tax tariff impact of just over $500 million for the full year, based on tariff levels in effect as of May 13, 2025. This cost is expected to disproportionately affect the Construction & Forestry segment (40% of the impact), followed by Small Ag and Turf (35%), and Production and Precision Ag (25%).

Segment-specific sales forecasts for FY25 are:

• PPA: Net sales down 15-20% (includes ~1% positive price, ~1.5% negative currency). Operating margin 15.5-17%.
• SAT: Net sales down 10-15% (includes ~0.5% positive price, flat currency). Operating margin 11.5-13.5%.
• CF: Net sales down 10-15% (includes ~1% negative price, flat currency). Operating margin 8.5-11.5%.
• FS: Net Income $750 million.

Cash flow from equipment operations is projected between $4.5 billion and $5.5 billion. The effective tax rate is expected to be between 20% and 22%.

The guidance assumes continued global uncertainty, high interest rates impacting customer borrowing costs and demand, and elevated used inventory levels. While farm fundamentals show some signs of stabilization in certain regions (e.g., Brazil, Europe dairy/livestock), overall demand is expected to remain subdued. Construction markets are supported by infrastructure spending but pressured by moderating housing starts, softening commercial real estate, and reduced rental fleet investment.

Key risks to this outlook include further deterioration in global economic conditions, unexpected shifts in trade policies and tariffs, prolonged high interest rates, volatility in commodity prices, supply chain disruptions, and adverse outcomes from legal proceedings. The pace at which used inventory levels can be reduced is also critical, as it impacts new equipment sales and pricing flexibility. Geopolitical tensions and weather patterns remain external factors that could influence agricultural demand.

Conclusion

Deere is currently navigating a significant cyclical downturn, reflected in its reduced sales and profit figures in the first half of fiscal 2025 and its cautious full-year guidance. The impact of lower market demand is compounded by external factors like tariffs and high interest rates. However, the company's performance demonstrates a notable level of resilience compared to previous cycles, a testament to the structural improvements implemented through its Smart Industrial strategy.

The proactive management of inventory and costs, coupled with a sustained focus on technological innovation, positions Deere to weather the current storm more effectively and emerge stronger. The quantifiable benefits of its precision agriculture and autonomous solutions are creating a durable competitive moat and laying the groundwork for future growth and profitability, even as near-term market conditions remain challenging. While risks persist, particularly around trade policy and market volatility, Deere's strategic execution and technological leadership provide a compelling narrative for investors looking for a high-quality industrial company positioned for long-term value creation beyond the current cyclical trough.