Deere's Strong Q1 Masks Cyclical Downturn and Overvalued Tech Hopes

What happened

Deere & Co delivered a robust Q1 double beat, raising net income guidance to $4.5B–$5B and driving a 40% YTD stock appreciation, as reported in a recent rating upgrade. This performance was fueled by outperformance in Construction & Forestry and Small Ag & Turf segments, benefiting from infrastructure demand and price realization, while Production & Precision Ag remained challenged. However, filings reveal a deeper cyclical downturn, with net income roughly halved from the 2023 peak to $5.0B in 2025, amid lower volumes, higher incentives, and tariff pressures. The company's transition to high-margin recurring software revenue, targeting 10% CAGR by 2030, underpins a long-term growth thesis but faces significant regulatory overhangs from FTC and right-to-repair actions that threaten aftermarket economics. Despite the positive news, the stock trades at a P/E of 35.78 and about 3x a conservative DCF value, indicating the market is already discounting a successful tech monetization amidst ongoing risks.

Implication

The raised guidance and segment outperformance offer near-term optimism, but they do not mitigate the fundamental cyclical pressures from farm income declines and construction volatility. High multiples leave little margin of safety if earnings fail to rebound or if software revenue growth proves elusive, especially given the stock's premium to intrinsic value. Regulatory risks, including FTC lawsuits and right-to-repair cases, could erode high-margin aftermarket and software profits, adding substantial downside potential. Monitoring progress on recurring revenue metrics and legal outcomes over the next 12–24 months is crucial for assessing any structural improvement. Until valuation normalizes or risks abate, maintaining a cautious or underweight position aligns with the broader risk/reward profile.

Thesis delta

The Q1 beat and guidance raise provide temporary momentum but do not alter the core DeepValue thesis of a potential sell due to overvaluation and unresolved cyclical-regulatory headwinds. Any positive shift hinges on clearer evidence of sustained software monetization and benign regulatory outcomes, which remain uncertain and already priced in. Thus, the delta is minimal, reinforcing the need for price discipline or fundamental improvements before reconsidering the stance.