Following Deere & Company's recent Q1 FY2026 earnings report and the subsequent adjustment to full-year guidance, how will the planned production cuts aimed at managing dealer inventory levels impact gross margins and operating leverage through the second half of 2026?

Deere & Company (DE) reported its Q1 FY2026 results on February 19, 2026, signaling a potential cyclical bottom for the agricultural equipment industry. While the company exceeded analyst expectations for the quarter, the strategic decision to maintain production levels below retail demand remains a central pillar of its FY2026 outlook. This "under-production" strategy is designed to aggressively right-size dealer inventories, particularly in the Large Agriculture segment, which has significant implications for gross margins and operating leverage through the second half of 2026. Q1 FY2026 Performance and Guidance Revision Deere’s Q1 results reflected a resilient performance despite a challenging macro environment for large-scale farming. The company reported net income of $656M , or $2.42 per share, surpassing the consensus estimate of $2.02. Total revenue reached $9.61B , a 13% year-over-year increase, driven by unexpected strength in construction and small agriculture. Following these results, management raised its full-year FY2026 net income guidance to a range of $4.5B to $5.0B (up from the previous $4.0B to $4.75B ). This upward revision suggests that while the "trough" of the cycle is occurring in 2026, the recovery in non-large ag segments is materializing faster than initially anticipated. Production Cuts and Inventory Normalization The primary headwind for H2 2026 remains the intentional misalignment between production and retail sales. Deere is currently under-producing to clear a backlog of new and used equipment. Large Agriculture: North American new inventory is now reportedly "aligned to retail demand," but the company continues to manage used inventory levels, which have declined by over -10% from their 2025 peak. Small Ag & Turf: Field inventories are running approximately -40% below last year’s levels, creating a "cleaner" channel for new model year launches in late 2026. Strategic Intent: By keeping production low, Deere aims to protect dealer profitability and maintain pricing integrity, preventing the deep discounting often seen during cyclical downturns. Impact on Gross Margins: The Absorption Challenge The planned production cuts through H2 2026 will exert downward pressure on gross margins due to negative manufacturing absorption. 1. Fixed Cost Under-Absorption: As factories operate at lower utilization rates, the fixed costs of manufacturing (labor, facility maintenance, and depreciation) are spread over fewer units, increasing the per-unit cost of goods sold (COGS). 2. Tariff Headwinds: Deere is navigating a projected $1.2B pre-tax tariff headwind for FY2026. While the company has implemented "disciplined pricing" to offset these costs, the combination of lower volumes and higher input costs makes margin expansion difficult in the near term. 3. Segment Divergence: Production & Precision Ag (P&PA) margins are expected to remain compressed, with FY2026 sales in this segment forecasted to decline between -5% and -10% . Conversely, the Construction & Forestry (C&F) segment is providing a margin cushion, with sales projected to rise +15% for the full year. Operating Leverage and H2 2026 Outlook Operating leverage—the sensitivity of operating income to changes in revenue—will likely remain negative or neutral through the second half of the year. Deleveraging in Large Ag: With Large Ag sales still in a contractionary phase, the high fixed-cost base of Deere’s heavy machinery plants will result in operating profit declining faster than revenue in that specific segment. Offsetting Growth: The +15% growth forecast for Small Ag & Turf and Construction & Forestry provides a critical counter-cyclical buffer. These segments are benefiting from a recovery in housing starts and infrastructure spending, which helps maintain overall corporate operating margins at a consolidated level. The 2027 Pivot: Management’s strategy is to sacrifice short-term operating leverage in H2 2026 to ensure a "coiled spring" effect for FY2027. By entering 2027 with lean inventories and a stabilized cost base, any uptick in replacement demand could lead to significant positive operating leverage as production ramps back up to meet or exceed retail demand. Risks and Uncertainties The primary risks to this outlook include: Commodity Price Volatility: If corn and soybean prices remain depressed, farmers may further delay the "replacement cycle," forcing Deere to extend production cuts into FY2027. Tariff Escalation: Should trade policies shift further, the $1.2B headwind could expand, potentially neutralizing the benefits of recent cost-reduction initiatives. Interest Rates: High financing costs for dealers and farmers continue to act as a drag on retail velocity, complicating the inventory clearing process.

Given the February 2024 USDA Net Farm Income projections indicating a continued squeeze on farmer liquidity, to what extent can Deere & Company's accelerated rollout of autonomous 'Precision Ag' subscription services offset the cyclical decline in large tractor and combine hardware sales this fiscal year?

The February 2024 USDA Net Farm Income (NFI) projections signaled a significant contraction in the agricultural economy, forecasting a -25.5% year-over-year decline to $116.1B . This liquidity squeeze, driven by falling commodity prices and a 3.8% rise in production expenses, created a challenging backdrop for Deere & Company (DE) in fiscal year 2024. While Deere’s "Precision Ag" subscription services are a core pillar of its long-term "Smart Industrial" strategy, their ability to offset the cyclical hardware decline in FY2024 remained limited by the sheer scale of the downturn in large equipment sales. Macroeconomic Context: The 2024 Liquidity Squeeze The USDA’s February forecast highlighted a sharp reversal from the record-high farm incomes of 2022. Key liquidity indicators for the U.S. farm sector showed: Net Cash Farm Income: Projected to fall -24.1% to $121.7B , nearly 14% below the 20-year average. Current Ratio: Expected to decline from 2.08 in 2023 to 1.88 in 2024, indicating tighter working capital. Production Expenses: Forecast to reach $463B , with labor and interest costs remaining stubbornly high despite some relief in fertilizer and fuel prices. This environment led to a "moderation in fleet replenishment," as farmers deferred large-scale capital expenditures (CapEx) for high-horsepower tractors and combines. Deere’s FY2024 Performance: Hardware vs. Software Deere’s fiscal 2024 results confirmed the severity of the cyclical downturn, which the nascent subscription model could not fully bridge: Production & Precision Ag (PPA) Sales: Net sales for this segment fell -16% for the full year to $20.57B , with a more drastic -38% drop in the fourth quarter. Operating Profit: PPA operating profit plummeted -64% in Q4, reflecting the high fixed-cost nature of manufacturing and the loss of operating leverage during volume declines. Total Net Income: Attributable net income for FY2024 was $7.1B , a -30% decline from the $10.17B record set in 2023. The Role of Precision Ag Subscriptions Deere’s "Solutions as a Service" (SaaS) model, which includes autonomous capabilities and "See & Spray" technology, is designed to decouple revenue from the equipment cycle. In FY2024, the rollout showed progress in adoption metrics but lacked the revenue density to neutralize hardware losses: Engaged Acres: Deere reported a 17% YoY growth in "engaged acres" (land utilizing Deere’s digital tools), reaching approximately 380M acres. Recurring Revenue Target: The company maintains a "Leap Ambition" goal of generating 10% of total enterprise revenue from recurring software/subscription fees by 2030. Strategic Pivot: To combat the liquidity squeeze, Deere accelerated the shift toward lower upfront hardware costs paired with per-acre or usage-based license fees. This "pay-as-you-go" approach aims to lower the barrier to entry for precision tech during low-income years. Analytical Conclusion: Extent of the Offset In the short term (FY2024), the "Precision Ag" subscription rollout provided a negligible financial offset to the multi-billion dollar decline in hardware sales. The PPA segment's revenue fell by over $6B year-over-year, a gap far exceeding the current scale of software-only revenue. However, the strategic offset is more significant. By increasing the "engaged acre" base during a downturn, Deere is building a larger installed base of connected machines. This creates a "sticky" ecosystem that should theoretically provide higher-margin, less volatile revenue in future cycles, even if it failed to prevent a significant earnings contraction in the current fiscal year.

In light of the current high-interest-rate environment affecting equipment financing, how is the credit quality of John Deere Capital Corporation's loan portfolio performing relative to historical cyclical troughs, and what are the implications for Deere & Company's overall dividend sustainability and share repurchase capacity in 2026?

The current high-interest-rate environment and a cyclical downturn in the agricultural sector have placed significant pressure on equipment financing. However, John Deere Capital Corporation (JDCC) maintains a credit profile that remains resilient when compared to previous cyclical troughs, such as the 2008–2009 Great Recession and the 2015–2016 agricultural slump. JDCC Credit Quality: Historical Comparison John Deere Capital Corporation’s loan portfolio is currently navigating a "trough" year in 2026, with credit metrics showing expected cyclical softening but remaining well-controlled relative to historical extremes. Delinquency Trends: At the end of fiscal 2024, total delinquencies (30+ days past due) for JDCC’s managed portfolio stood at 3.06% . While this represents an increase from the ultra-low levels of 2022, it remains manageable compared to the 2016 trough, where retail note delinquencies reached approximately 1.99% (on a 60+ day basis, which typically correlates to a higher 30+ day figure). Net Charge-Offs (NCOs): Historically, JDCC has maintained exceptionally low loss rates. In the 2009 trough, net write-offs peaked at 0.70% of the average owned portfolio. In the 2016 downturn, this figure was significantly lower at 0.23% . For Q1 2026, JDCC reported a lower provision for credit losses year-over-year, suggesting that the current portfolio is performing better than initial defensive positioning anticipated. Provisioning & Spreads: Financial Services net income rose to $244M in Q1 2026, driven by favorable financing spreads. This indicates that JDCC has successfully passed through higher borrowing costs to customers while maintaining a high-quality borrower base, primarily consisting of large-scale, well-capitalized producers. Dividend Sustainability in 2026 Deere & Company (DE) has a long-standing policy of targeting a dividend payout ratio of 25% to 35% of mid-cycle earnings. Payout Ratio Analysis: With 2026 net income guidance recently raised to a range of $4.5B to $5.0B , the current quarterly dividend of $1.62 per share (annualized at $6.48 ) results in a payout ratio of approximately 35% . Sustainability Outlook: While the payout is currently at the upper bound of management’s target range, the dividend is considered sustainable due to the company’s robust cash flow from operations, projected at $4.0B to $5.0B for 2026. Management’s decision to maintain the dividend during this trough year signals confidence that 2026 represents the bottom of the current cycle. Share Repurchase Capacity & Capital Allocation Share repurchases remain the lowest priority in Deere’s "Use-of-Cash" hierarchy, following the funding of operations, maintenance of an "A" credit rating, and dividend payments. Authorization & Execution: As of late 2025, Deere had approximately $7.9B remaining under its $18B share repurchase authorization. In Q1 2026, the company returned nearly $750M to shareholders through a combination of dividends and buybacks. 2026 Capacity: Repurchase capacity in 2026 is "opportunistic" rather than aggressive. Given that net income is down from the $10.17B peak in 2023, the volume of buybacks is expected to be lower than in previous years. However, the company’s high cash balance (reported at $6.8B in Q1 2026) provides sufficient liquidity to continue modest repurchases to offset dilution from share-based compensation and provide a floor for EPS during the trough. Summary of Implications The 2026 fiscal year is characterized by defensive financial management. While JDCC’s credit quality has softened, it remains structurally superior to the 2009 trough. For Deere & Company, the dividend is secure but unlikely to see aggressive growth until the agricultural cycle turns, while share repurchases will likely remain at a maintenance level to preserve the balance sheet for the anticipated 2027 recovery.

Deere & Company (DE) Stock Price & AI Analysis

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Valuation

50Fair Value

Sentiment

31Bearish

Risk

80Low Risk

Momentum

91Positive

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Catalyst Roadmap

Event timeline with expected impact & market context

Deep Insights

Fact-checked analysis & score logic breakdown

Financial Statements

Margin Trends

Gross

36.5%▼2.1pp

Revenue after COGS

Operating

18.8%▼3.8pp

After operating expenses

Net

11.3%▼2.8pp

Bottom-line profitability

Gross Margin

Operating Margin

Net Margin

Valuation Snapshot

P/E Ratio

24.9

Price vs earnings

EV/EBITDA

15.5

Enterprise value

FCF Yield

2.6%

Cash generation

Earnings Yield

4.0%

Inverse of P/E

Capital Efficiency

10

GoAI Quality ScoreFair

ROEReturn on Equity

19.4%Strong

ROAReturn on Assets

4.7%Fair

ROICReturn on Invested Capital

7.1%Fair

Financial Health

Current RatioHealthy

2.31

Short-term solvency (>1.5)

Net Debt / EBITDAHigh

4.78x

Debt repayment capacity (<3x)

Income QualityStrong

1.48

Cash backs earnings (>1)

Revenue & Profitability

Revenue

Net Income

Net Loss

Income Statement

Metric	FY2025	FY2024	FY2023	FY2022	FY2021
Revenue	$44.66B	$50.52B	$60.25B	$51.28B	$43.03B
Gross Profit	$16.30B	$19.50B	$22.31B	$15.73B	$13.71B
Gross Margin	36.5%	38.6%	37.0%	30.7%	31.9%
Operating Income	$8.42B	$11.43B	$14.59B	$9.03B	$7.66B
Net Income	$5.03B	$7.10B	$10.17B	$7.13B	$5.96B
Net Margin	11.3%	14.1%	16.9%	13.9%	13.9%
EPS	$18.56	$25.72	$34.80	$23.42	$19.14

Average Price Target

$619.09▼ 6.6% Downside

Past 12 Months

12 Month Forecast

Based on 50 Wall Street analysts offering 12 month price targets for Deere & Company, the average price target is $619.09, with a high forecast of $793.00 and a low forecast of $458.00. The average price target represents a 6.6% decrease from the current price of $662.49.

Highest

$793.00

Average

$619.09

Lowest

$458.00

Rating Distribution

Strong Buy

0

0%

Buy

19

42%

Hold

20

44%

Sell

6

13%

Strong Sell

0

0%

Recent Analyst Ratings

FirmActionRatingDate

UBS● Maintain

Buy

2026-02-20

B of A Securities● Maintain

Neutral

2026-02-20

Truist Securities● Maintain

Buy

2026-02-20

Baird● Maintain

Neutral

2026-02-20

RBC Capital● Maintain

Outperform

2026-02-20

Jefferies● Maintain

Hold

2025-12-09

DA Davidson● Maintain

Buy

2025-12-01

Oppenheimer● Maintain

Outperform

2025-11-28

Evercore ISI Group● Maintain

In Line

2025-11-28

RBC Capital● Maintain

Outperform

2025-11-28

Earnings History & Surprises

BEAT RATE

94%

Last 18 quarters

AVG SURPRISE

+11.3%

EPS vs Estimate

BEATS / MISSES

17/1

Last 18 quarters

LATEST EPS

$2.42

Q1 '26

QUARTERLY EPS TREND

Estimated

Beat

Miss

QUARTERLY DETAIL

Q1 '26

+19.8%

$2.42 vs $2.02

Q4 '25

+2.3%

$3.93 vs $3.84

Q3 '25

+3.9%

$4.75 vs $4.57

Q2 '25

+19.4%

$6.64 vs $5.56

Q1 '25

+2.6%

$3.19 vs $3.11

Q4 '24

+17.0%

$4.55 vs $3.89

Q3 '24

+11.7%

$6.29 vs $5.63

Q2 '24

+8.5%

$8.53 vs $7.86

Q1 '24

+19.6%

$6.23 vs $5.21

Q4 '23

+11.4%

$8.32 vs $7.47

Q3 '23

+24.4%

$10.20 vs $8.20

Q2 '23

+12.3%

$9.65 vs $8.59

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