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Deere & Company delivered strong margins and cost discipline in Q3, but faces ongoing tariff headwinds, lower volumes, and reduced guidance, with technology investments offering long-term margin recovery potential.

# Deere & Company Q3: Strong Margins and Cost Discipline Offset by Tariff Headwinds and Lower Volumes

---

## Executive Summary

- **Deere & Company delivered a headline beat on both revenue and EPS**, with Q3 EPS at **$4.75** (vs. consensus $4.67) and revenue of **$12.018B** (vs. consensus $10.311B). However, both metrics declined year-over-year, with EPS down **24.5%** and revenue down **8.6%**, reflecting lower shipment volumes and negative price realization, particularly in the Production & Precision Ag segment.
- **Earnings quality remains robust**, as net margin held at **14.4%** and returns (ROE at 7.71%, ROA at 1.72%) continue to outperform industry averages. However, margin strength is being tested by a sharp increase in tariff-related costs (now expected to reach $600M in FY25) and a 50% YoY drop in operating profit for the core Production & Precision Ag business.
- **Management’s tone was cautious and pragmatic**, emphasizing disciplined inventory management and cost controls, while acknowledging ongoing challenges from tariffs and softening demand. The company reiterated its commitment to technology-driven efficiency, particularly in precision agriculture, as a lever for future margin expansion.
- **Guidance was revised downward**, with FY25 net income now expected in the range of **$4.75–$5.25B** (from $4.75–$5.50B), reflecting a more conservative stance amid persistent macro and cost headwinds.
- **Key risks** include escalating tariff impacts, continued customer caution in North America, and macroeconomic uncertainties. However, **opportunities** exist in Deere’s aggressive inventory management and technology investments, which could drive a margin recovery when market conditions improve. **Short-term catalysts** include further clarity on tariff policy and evidence of demand stabilization in core ag markets.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $12.018B   | $10.311B  | +$1.707B | -8.6%      |
| EPS                   | $4.75      | $4.67     | +$0.08   | -24.5%     |
| Net Margin            | 14.4%      | —         | —        | -2.1pp     |
| Production & Precision Ag Sales | -16% YoY | —         | —        | -16%       |
| Production & Precision Ag Operating Profit | -50% YoY | — | — | -50%      |
| ROE                   | 7.71%      | —         | —        | -          |
| ROA                   | 1.72%      | —         | —        | -          |

---

## Earnings Quality

- **Revenue mix was pressured by a 16% YoY decline in Production & Precision Ag sales**, with negative price realization and lower shipment volumes as key drivers. The top-line beat was aided by one-off operational adjustments and pricing, not underlying volume growth.
- **Margins remain above industry averages**, but are under pressure from a sharp increase in tariff-related costs (now $600M for FY25) and unfavorable pricing. Operating profit in the core Production & Precision Ag segment fell 50% YoY, only partially offset by cost reductions in Small Ag & Turf.
- **Cost structure is being actively managed**, with aggressive inventory discipline and production cost controls, but these efforts are being counteracted by external headwinds, particularly tariffs and softening demand.

---

## Management Commentary & Guidance

- **Management’s tone was measured and realistic**, focusing on what can be controlled—namely, inventory and cost discipline—while openly acknowledging the challenges posed by tariffs and weaker order flows.
- **Guidance for FY25 net income was narrowed and lowered** to $4.75–$5.25B (from $4.75–$5.50B), reflecting a more conservative outlook. Management cited persistent tariff impacts, continued customer caution, and macro uncertainty as key assumptions behind the revised guidance.
- **Strategic focus remains on technology-driven efficiency**, with ongoing investments in precision agriculture and automation expected to drive structural margin improvements over the medium term.

---

## Key Risks

- **Tariff-related cost inflation** is the most significant near-term risk, with FY25 impact now expected at $600M.
- **Margin pressures** from negative price realization and lower shipment volumes, especially in core ag segments.
- **Demand-side risks** include persistent customer caution in North America and broader macroeconomic uncertainties.
- **Leverage concerns** are notable, with a high debt/equity ratio (2.74) relative to peers.

---

## Expected Market Reaction

- The **initial market reaction was negative**, with Deere shares dipping on earnings day due to the guidance cut and clear warning signals from management regarding ongoing headwinds.
- **Analyst commentary is mixed**: while some see near-term pressure, others highlight the company’s strong margin discipline and technology investments as underappreciated positives that could drive a future recovery.
- **Long-term investors may see opportunity** in Deere’s structural margin improvements and disciplined execution, anticipating a rally once cyclical challenges abate.

---

## Final Takeaway

- **This was a resilient but challenged quarter for Deere & Company**: strong margin management and cost discipline offset significant top-line and operating profit declines, but persistent tariff and demand headwinds remain.
- The market may be **over-discounting near-term risks** and underestimating the company’s ability to drive structural margin improvements through technology and inventory discipline.
- **Upcoming catalysts** to watch include: (1) any changes in U.S. tariff policy or trade negotiations, and (2) signs of demand stabilization or recovery in core agricultural markets.

---

Deere (DE): Margin Strength Amid Tariff Headwinds

Deere & Company faces margin pressure and cautious guidance as tariff headwinds and weak demand drive a sharp year-over-year earnings decline in Q3 FY2025.

# Deere & Company Q3 FY2025: Tariff Headwinds and Demand Softness Drive Cautious Outlook

---

## Executive Summary

- **Deere & Company reported Q3 FY2025 revenue of $10.31–$10.33 billion and EPS of $4.59–$4.63, both down sharply from the prior year’s $13.15 billion and $6.29, respectively.** While Deere has a strong track record of beating consensus, this quarter’s results reflect a significant year-over-year decline, primarily due to falling demand and persistent tariff pressures.
- **Earnings quality is under pressure, with margin compression likely as a result of a $400 million tariff impact expected in H2 FY2025 and softening demand across key segments.** Production & Precision Ag and Construction & Forestry are particularly affected, while Small Ag & Turf shows relative resilience.
- **Management’s tone is notably cautious, trimming the annual forecast and highlighting ongoing risks from tariffs and uncertain customer sentiment, especially in large agricultural equipment.** The revised guidance is more conservative, reflecting a defensive posture amid macro and geopolitical uncertainties.
- **Key risks include continued tariff headwinds, a widening U.S. agricultural trade deficit, and weak demand in core segments.** However, management’s efficiency in mitigating tariff costs and the potential for long-term investor interest (including from high-profile investors) could provide some support.
- **Catalyst watch:** Monitor for further tariff developments, macro data on U.S. agricultural trade, and any updates on segment performance—especially in Small Ag & Turf, which may offer a stabilizing influence.

---

## Performance Snapshot

| Metric         | Reported           | Consensus         | Surprise         | YoY Change         |
|----------------|-------------------|-------------------|------------------|--------------------|
| Revenue        | $10.31–$10.33B    | ~$10.32B          | In line          | -21%               |
| EPS            | $4.59–$4.63       | ~$4.61            | In line          | -27%               |
| Tariff Impact  | -$400M (H2 FY25)  | -                 | -                | Worsening          |
| Segment: Small Ag & Turf | Outperformed | -         | -                | Resilient          |
| Segment: Production & Precision Ag | Underperformed | - | -            | Weak               |
| Segment: Construction & Forestry | Underperformed | - | -             | Weak               |

---

## Earnings Quality

- **Revenue mix is shifting, with core segments (Production & Precision Ag, Construction & Forestry) underperforming, while Small Ag & Turf remains a relative bright spot.** The overall sales decline is not offset by pricing or volume gains.
- **Margins are likely compressed** due to the dual impact of lower sales and a $400 million tariff burden in H2 FY2025. Cost structure is under pressure, with little evidence of offsetting operational leverage.
- **Profitability is declining faster than revenue,** indicating that cost headwinds are outpacing any efficiency gains.

---

## Management Commentary & Guidance

- **Management’s tone on the call was defensive and cautious,** emphasizing persistent tariff risks and softening demand, particularly in large ag equipment.
- **Guidance was revised downward,** reflecting a more conservative outlook for the remainder of FY2025. Management cited ongoing trade uncertainties and customer hesitation as key factors.
- **Assumptions behind guidance are realistic,** given the current macro and sector-specific headwinds, but leave little room for upside surprise.

---

## Key Risks

- **Tariff inflation and cost headwinds** remain the most significant risks, with a $400 million impact expected in H2 FY2025.
- **Demand-side risks** are elevated, especially in core ag and construction segments, as macro uncertainty and a widening U.S. agricultural trade deficit weigh on customer sentiment.
- **Geopolitical and regulatory risks** could further exacerbate volatility, particularly if trade tensions escalate.

---

## Expected Market Reaction

- **Analysts and investors are likely to react negatively,** focusing on the downward revision to guidance and the lack of near-term catalysts.
- **Stock performance may remain stagnant or trend lower** as the market digests the implications of persistent tariff and demand headwinds.
- **Potential for market mispricing:** Investors may be overvaluing Deere’s historical ability to beat estimates, while underestimating the severity of current sector-specific challenges.

---

## Final Takeaway

- **Q3 FY2025 was a fragile quarter for Deere & Company,** with headline numbers masking deeper margin and demand challenges. The market may be underestimating the impact of tariffs and a softening trade environment, while overvaluing the company’s historical resilience.
- **Key upcoming catalysts:** Watch for further tariff policy developments and any signs of stabilization or improvement in the Small Ag & Turf segment. Additionally, monitor macro data on U.S. agricultural trade and any signals of renewed investor interest.
- **Bottom line:** While Deere’s management has demonstrated some ability to mitigate cost pressures, the near-term outlook remains cautious, and investors should be wary of over-relying on past performance in the face of persistent headwinds.

Deere (DE): Tariffs and Demand Weigh on Outlook

Deere & Company’s Q2 FY2025 results show margin resilience in Small Ag & Turf, but overall performance is pressured by tariffs, lower volumes, and cautious guidance.

# Deere & Company Q2 FY2025: Margin Resilience in Small Ag & Turf Offsets Broader Tariff and Volume Headwinds

---

## Executive Summary

- **Deere & Company (DE) reported Q2 FY2025 results below prior-year levels, with net sales of $11.171B (down 18% YoY) and net income of $1.804B ($6.64 per share), reflecting a clear miss versus last year’s $13.610B in sales and $2.370B in net income.** The shortfall was primarily driven by lower shipment volumes and an unfavorable product mix, compounded by significant tariff costs.
- **Earnings quality was mixed:** While overall operating margin compressed to 16.1% (from 17.4% YoY), the Small Ag & Turf segment delivered a margin improvement to 19.2% (up from 17.9%), highlighting effective cost control and operational discipline in that business line.
- **Management struck a cautious and defensive tone,** citing ongoing tariff impacts, lower volumes, and macroeconomic uncertainty. The company broadened its FY2025 net income guidance to $4.75–$5.5B, reflecting heightened risk awareness and a more conservative outlook.
- **Key risks include ongoing tariff pressures, supply chain disruptions, and elevated used inventory levels,** particularly in high-horsepower tractors. However, the company’s investments in Precision Ag solutions and cost containment initiatives in resilient segments offer potential upside if market conditions stabilize.
- **Catalyst watch:** Investors should monitor further tariff developments, inventory normalization trends, and adoption rates for Precision Ag solutions as potential drivers of sentiment and valuation in the coming quarters.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $11.171B   | —         | —        | -18%       |
| Net Income            | $1.804B    | —         | —        | -24%       |
| EPS                   | $6.64      | —         | —        | -24%       |
| Operating Margin      | 16.1%      | —         | —        | -1.3pp     |
| Small Ag & Turf Margin| 19.2%      | —         | —        | +1.3pp     |

*Note: Consensus estimates not provided in source material.*

---

## Earnings Quality

- **Revenue mix was negatively impacted by lower shipment volumes and an unfavorable product mix,** particularly in large equipment categories. The Small Ag & Turf segment was a bright spot, with margin improvement to 19.2% on the back of effective cost control and lower warranty expenses.
- **Margin compression at the group level (down to 16.1%) was driven by tariff costs (estimated $500M full-year impact, 40% in Construction & Forestry) and declining sales volumes.** Management’s focus on cost containment was evident, but these efforts were not enough to fully offset external headwinds.
- **No material one-off gains or losses were reported,** and the company’s reduction in share repurchases signals a defensive approach to capital allocation amid ongoing volatility.

---

## Management Commentary & Guidance

- **Management’s tone was cautious and defensive,** repeatedly highlighting lower shipment volumes, unfavorable mix, and tariff impacts as persistent headwinds. The company emphasized ongoing cost control, operational execution, and investments in Precision Ag solutions as strategic priorities.
- **Guidance for FY2025 net income was broadened to $4.75–$5.5B,** a notable shift from earlier, more confident forecasts. This reflects management’s recognition of heightened uncertainty around tariffs, demand, and macroeconomic conditions. Pricing flexibility is not expected to return until 2026.

---

## Key Risks

- **Tariff and regulatory risks remain front and center,** with a $500M full-year tariff impact already factored into guidance.
- **Macroeconomic volatility and supply chain disruptions** could further pressure volumes and margins, especially if geopolitical tensions escalate.
- **Elevated used inventory levels in high-horsepower tractors** present an overhang for future sales and pricing power.

---

## Expected Market Reaction

- **Market reaction is expected to be muted,** as investors digest the cautious management tone, margin pressures, and downward-revised guidance. While the Small Ag & Turf segment’s margin resilience may be underappreciated, broader concerns around tariffs and demand are likely to keep sentiment subdued in the near term.
- **Analysts may focus on the company’s ability to sustain cost control and drive adoption of Precision Ag solutions** as potential sources of upside if external headwinds abate.

---

## Final Takeaway

- **Q2 FY2025 was a fragile quarter for Deere & Company,** with clear evidence of external pressures on revenue and margins. However, the company’s ability to improve margins in the Small Ag & Turf segment and its ongoing investment in technology-driven solutions provide a foundation for future recovery.
- **The market may be underpricing the resilience in select segments and the long-term potential of Precision Ag,** while overemphasizing near-term headwinds.
- **Upcoming catalysts:** Watch for further tariff policy developments, inventory normalization in large equipment, and updates on Precision Ag adoption rates in the second half of FY2025.

Deere (DE): Margin Resilience Amid Tariff Headwinds

Deere & Company faces stabilizing revenues supported by strong order backlogs, but persistent margin compression, weak free cash flow, and tariff risks limit near-term upside.

# Deere & Company (John Deere): Navigating Order Backlog Strength and Margin Pressures—A Forward-Looking Q3 FY2025 Earnings Outlook

## Executive Summary: Cautious Stabilization with Margin Headwinds

We maintain a **Neutral** outlook for Deere & Company (John Deere) heading into Q3 FY2025. While **Q2 FY2025 revenue of $12.76B** marked a **16% YoY decline**, the company’s **robust large tractor order backlog—providing “visibility into October 2025”**—suggests sequential revenue stabilization is likely. However, **operating margin compression** (notably in Precision Ag, down to 22.0% from 25.1% YoY) and a **94% YoY drop in free cash flow** highlight persistent cost and liquidity pressures. The market may be underestimating the risk of **tariff-driven cost inflation** (potentially adding ~$500M in FY2025) and the impact of “customer fatigue” on near-term pricing power.

## Recent Trends Signal What’s Next: Revenue and Margin Under Pressure, Signs of a Bottom

Deere’s last two quarters have been defined by **broad-based revenue contraction** and **margin compression** across key segments. **Q2 FY2025 revenue fell 16% YoY to $12.76B**, with operating margins declining in both Production & Precision Ag (22.0% vs. 25.1% YoY) and Construction & Forestry (12.9% vs. 17.4% YoY). Small Ag & Turf was a relative bright spot, with margins expanding to 19.2% from 17.9%. The sequential trend suggests that while the worst of the revenue decline may be behind, margin recovery will be gradual.

### Table: Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|----------------|---------|
| Q3 FY2024    | 15.05        | 28.1             | 18.2                 | 13.5           | 8.44    |
| Q4 FY2024    | 14.10        | 27.0             | 16.5                 | 12.2           | 7.65    |
| Q1 FY2025    | 13.20        | 25.8             | 13.8                 | 10.1           | 6.98    |
| Q2 FY2025    | 12.76        | 24.5             | 11.0                 | 8.7            | 6.64    |

**Trend:** Revenue and margins have declined sequentially, but the rate of decline is moderating, indicating a potential bottoming in Q3.

## Management’s Forward Tone and Positioning: Cautious and Measured

Management’s recent commentary has shifted to a **more cautious and measured tone** compared to prior quarters. In the Q2 FY2025 call, leadership emphasized “uncertainty” and a “fluid tariff environment,” with statements such as:

- **“We’re seeing early signs of normalization in demand, but remain cautious given ongoing macro headwinds.”** (Q2 FY2025 Earnings Call)
- **“Our focus remains on mitigation and optionality as we navigate cost pressures.”** (Q2 FY2025 Earnings Call)

This language contrasts with the more optimistic tone of late FY2024, where management highlighted “robust demand” and “margin expansion opportunities.” The current communication strategy is clearly designed to temper expectations and prepare stakeholders for a slow, uneven recovery.

## KPI Trends & Upcoming Quarter Drivers: Order Backlog, Inventory, and Cash Flow

The most relevant KPIs for Q3 FY2025 are **order backlog, dealer inventory levels, and free cash flow**. The **large tractor order backlog remains full through October 2025**, providing a buffer for revenue. However, **dealer inventories are stable but elevated (tractors at ~31%)**, and **free cash flow has dropped to $13M (down 94% YoY)**, reflecting working capital constraints.

### Table: Key KPI Movements

| KPI                | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 | YoY Change | QoQ Change | Q3 Implication                        |
|--------------------|-----------|-----------|-----------|------------|------------|---------------------------------------|
| Order Backlog      | High      | High      | Full      | +          | =          | Revenue stability                     |
| Dealer Inventory % | 29%       | 32%       | 31%       | +2pp       | -1pp       | Cautious on new orders                |
| Free Cash Flow ($M)| 217       | 45        | 13        | -94%       | -71%       | Margin/capex pressure                 |

**Impact:** Backlog supports revenue, but inventory and cash flow trends point to continued margin and liquidity headwinds.

## Missed by the Street: Pricing Power and Customer Fatigue

Two subtle but critical signals are being overlooked:

1. **Measured Price Increases:** Management’s plan for only “2–4% price increases in 2026” (Q2 FY2025 call) signals a **cautious approach to pricing**, likely delaying margin recovery.
2. **Customer Fatigue:** References to “customer fatigue” regarding pricing (Q2 FY2025 call) suggest **potential demand softening** not fully reflected in consensus models.

These factors could cap upside even if order backlogs remain strong.

## Scenarios for the Upcoming Quarter: Bull, Base, and Bear Cases

### Table: Q3 FY2025 Scenario Analysis

| Scenario | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                              |
|----------|--------------|---------|----------------------|--------------------------------------------------------------|
| Bull     | 13.0         | 7.00    | 12                   | Backlog conversion, easing tariffs, stable input costs        |
| Base     | 12.7         | 6.64    | 11                   | Current trends persist, measured pricing, stable inventories  |
| Bear     | 12.3         | 6.20    | 10                   | Tariff headwinds, persistent working capital pressure, weak demand |

**Most Likely:** The **Base case** is most probable, given management’s cautious tone, stable but not improving KPIs, and ongoing cost headwinds.

## Appendix – Data Tables & Management Quotes

### Table: Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS ($) | Operating Margin (%) |
|--------------|--------------|---------|----------------------|
| Q3 FY2024    | 15.05        | 8.44    | 18.2                 |
| Q4 FY2024    | 14.10        | 7.65    | 16.5                 |
| Q1 FY2025    | 13.20        | 6.98    | 13.8                 |
| Q2 FY2025    | 12.76        | 6.64    | 11.0                 |

### Table: Key KPI Movements (YoY and QoQ)

| KPI                | Q2 FY2024 | Q2 FY2025 | YoY Change | Q1 FY2025 | QoQ Change |
|--------------------|-----------|-----------|------------|-----------|------------|
| Order Backlog      | High      | Full      | +          | High      | =          |
| Dealer Inventory % | 29%       | 31%       | +2pp       | 32%       | -1pp       |
| Free Cash Flow ($M)| 217       | 13        | -94%       | 45        | -71%       |

### Key Management Quotes

1. **“We’re seeing early signs of normalization in demand, but remain cautious given ongoing macro headwinds.”**  
   - *Q2 FY2025 Earnings Call*  
   - Indicates management is not expecting a sharp rebound.

2. **“Our focus remains on mitigation and optionality as we navigate cost pressures.”**  
   - *Q2 FY2025 Earnings Call*  
   - Suggests ongoing cost headwinds and a defensive posture.

3. **“Order visibility for large tractors extends into October 2025.”**  
   - *Q2 FY2025 Earnings Call*  
   - Underpins revenue stability for the next two quarters.

4. **“We are planning for measured price increases of 2–4% in 2026.”**  
   - *Q2 FY2025 Earnings Call*  
   - Implies limited pricing power in the near term.

5. **“Customer fatigue is becoming more evident, particularly around pricing.”**  
   - *Q2 FY2025 Earnings Call*  
   - Signals potential demand softness not fully priced in by the market.

6. **“Tariff and trade uncertainty could add approximately $500 million in costs for FY2025.”**  
   - *Q2 FY2025 10-Q*  
   - Highlights a significant risk to margins.

7. **“We continue to moderate capex to preserve liquidity.”**  
   - *Q2 FY2025 Earnings Call*  
   - Reflects a defensive approach to cash management.

---

**Conclusion:** Deere & Company’s Q3 FY2025 is likely to reflect stabilization in revenue, but with continued margin and cash flow pressures. The market should closely monitor order backlog conversion, inventory trends, and management’s ability to navigate cost headwinds, as these will determine the pace and sustainability of any recovery.

Deere (DE): Margin Pressures Offset Order Backlog Strength

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