Deere Beats Q2 Estimates, But Ag Weakness Weighs on Outlook

Goldman Sachs just told you what to buy (most people missed it) (From Behind the Markets)

Deere & Co. (NYSE: DE) delivered a Q2 2026 earnings report that didn’t hide the ball. That transparency makes it easy to understand why DE dropped nearly 5% after the report’s release. The industrial giant posted a double-beat, including a 15% beat on adjusted earnings per share (EPS). But the company’s report showed that the heavy lifting (no pun intended) is being done by its Construction and Forestry business.

That dovetails nicely with the blockbuster report from NVIDIA Corp. (NASDAQ: NVDA) that showed data center demand continues to grow and is likely to continue for several years.

But Deere's report also showed weakness in its Production and Precision Agriculture business. That’s been the golden goose for Deere, and for now it’s a little tarnished.

Plus, while the construction demand is likely to be in play for several quarters, that isn’t likely to do a heavy lift on earnings. In fact, Deere reiterated its full-year earnings guidance.

That suggests that any artificial intelligence (AI) tailwind will simply help earnings from deteriorating, rather than driving further growth.

Farmers Continue to Face Headwinds

It’s not easy being a farmer under good conditions. But the last few years have been particularly cruel to the industry. Inflation for farmers is about more than fuel. It’s fertilizer, seeds, and the elevated costs for heavy equipment like tractors and combines. All of these are on the rise, mostly due to the conflict with Iran that has brought traffic in the Strait of Hormuz to a standstill.

That's why net sales in the Production and Precision Agriculture business were down 14% in the quarter, and Deere guided to a full-year loss between 5% and 10%. The company also forecasted a lower operating margin between 11% and 13%, down from 15.4% on a year-over-year basis.

For investors who are familiar with Deere’s revenue mix, one item in the report that stood out was the projected 15% net sales decline for the company’s Ag business in South America and softness in Asia and Europe as well.

The company generates about 40% of its revenue outside the United States. It has a particularly strong presence in Latin America, which accounts for over $5.5 billion in annual sales. That's helped it weather softness in the U.S. dollar. But that advantage won’t matter if revenue declines.

The industry got potentially good news from the U.S.-China summit, with the White House estimating that China will buy an additional $17 billion in American farm goods annually. That would extend beyond the country’s initial commitment to buy soybeans.

AI to the Rescue?

As challenging as the situation in the company’s core business looks, a diversified business model has its advantages. Deere posted strong gains in its Construction and Forestry business, highlighted by strong data center demand. The company forecasted net sales growth of 20% for the year, with an operating margin between 10% and 12%, above today’s 9%.

Deere also forecasts growth in its Small Ag and Turf business. This includes the company’s specialty, utility, and compact tractors that are used for commercial mowing, golf course maintenance, and utility vehicles. It sometimes gets lumped in with the Precision Ag business, but it would be a mistake for investors not to break apart the two sectors right now.

DE Is Still a Stock to Hold

At 30x earnings, DE is still trading at a slight premium to the S&P 500 and its own historical average. But that valuation has come down from recent readings of about 32x earnings. The same is true of the company’s price-to-sales (P/S) and price-to-book (P/B) ratios.

The bottom line is that Deere has earned that premium because of its pivot into AI, which is likely to pay off in the long term. The company has become part of the larger connectivity story, as evidenced by its inclusion in the SpaceX S-1 filing, where Deere is listed as a Starlink customer.

That alone is enough reason to hold DE and to consider buying the stock on this dip, which is now about 20% in the last three months. But if the company is right about its profit outlook, there could be some choppiness before the payoff. The company’s safe dividend that yields 1.2% won’t be confused for a high-yield dividend, but it is well capitalized and does provide shareholder value while the company’s fortunes reverse.

That’s still the belief of analysts who had a consensus price target of $655.45 on DE heading into earnings. With the post-earnings dip, that would equal more than 20% upside, which would grow if the pullback continues.

For now, momentum is on the bearish side. However, DE is now approaching oversold territory, which could mean that sellers are getting exhausted. That's supported by the lighter-than-average volume following the earnings release.

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