Deere & Company (DE) — Great Franchise, Cyclical Tape: A Clear, Data-Driven SOTP-DCF Read

오리 오리
Oct 27
4 min read

Executive Summary

Deere sits at the center of precision agriculture and connected heavy equipment, pairing a best-in-class hardware franchise with sticky software, parts, and a captive finance arm. I built a five-year, SOTP valuation: a DCF for Equipment Operations (EO) and a Residual-Income (RI) model for Financial Services (FS), grounded in audited FY2024 figures and a down-cycle Year 1. The model’s fair-value range lands at ~$227–$583 per share across conservative, base, and bull scenarios—with a base case near ~$357. The spread reflects real cyclicality (ag demand normalization, dealer destock) and the ROE/COE math inside FS. Execution is solid, but the near-term tape is cyclical.

Why This Company Matters

Deere’s edge is operational: not just green paint and brand, but uptime economics. Precision features, connected machines, and dealer support turn iron into an annuity of data, parts, and service. That flywheel—installed base → data → outcomes—creates durability. Add a captive finance arm that supports retail and dealer credit through cycles, and the platform can compound as the next replacement wave builds.

What Actually Changed (Qualitatively)

Over the last year, management prioritized channel health and price discipline as farm incomes normalized. Guidance implies a softer year and dealer destocking. In plain English: Deere is trading some near-term units for better long-term mix and margins. The story is less “straight up” and more “reset, then re-accelerate” as precision adoption continues.

Modeling Approach (Simple, Falsifiable, and Transparent)

I used a five-year sum-of-the-parts:

Equipment Operations (EO): DCF on net sales, with an explicit FCF-margin ramp anchored to FY2024 cash-flow math (CFO – capex).
Financial Services (FS): Residual-Income model off starting book value and ROE vs. cost of equity (COE).

The four levers you can truly underwrite: (1) EO revenue growth, (2) EO FCF-margin path, (3) EO discount rate (WACC) and terminal growth (g), and (4) FS ROE/COE trajectory. I avoid heroic “forever” assumptions; the workbook shows how value moves when you turn those knobs.

Core Assumptions (Base Case)

EO growth (5y): −10%, 0%, +3%, +4%, +3% (down-cycle first, normalization later)
EO FCF margin: ~11.5% → ~13.5% on pricing, productivity, and parts/service pull-through
EO discount rate (WACC): 8.0%
Terminal growth (g): 2.25%
FS (RI model): ROE 9.5% → 12.5%, COE 12%, payout 40%
Shares (diluted): modeled consistently across scenarios

If you believe the cycle turns faster, or precision penetration sustains higher mix/margins, the model will show how much that’s worth.

SOTP-DCF Results (Per-Share Fair Value)

Conservative: EO growth −20% → +3%, EO FCF 10% → 12.5%, WACC 9%, g 2%; FS COE 12% → ≈ $227
Base: EO growth −10% → +3–4%, EO FCF 11.5% → 13.5%, WACC 8%, g 2.25%; FS COE 12% → ≈ $357
Bull: EO growth 0% → +5%, EO FCF 12.5% → 15.5%, WACC 7.5%, g 2.75%; FS COE 11% → ≈ $583

Interpretation: Range is wide because ag is cyclical and FS value is sensitive to ROE–COE spreads. To argue for the top end today, you need faster unit recovery, durable price/mix, and a healthy credit backdrop.

What Could Prove the Model Too Cautious

Quicker-than-expected channel normalization and replacement demand
Precision features translating to persistently high price/mix and parts/service attach
FS credit outcomes staying benign, keeping ROE > COE
Construction/forestry inflecting alongside infrastructure/housing

Key Risks That Can Break the Story (or the Multiple)

Lower farm incomes or higher rates delaying equipment purchases
Dealer destock and used inventory weighing longer than expected
Pricing giveback as supply normalizes; mix drift
FS credit losses or funding-cost pressure compressing ROE vs. COE

How to Use the Model (Actionable)

Open the workbook’s Inputs and move four things: EO growth, EO FCF margin, EO WACC/g, and FS ROE/COE/payout. The Sensitivity tab shows how EO WACC × g moves per-share value. Want comparables? Add EV/Sales and EV/EBITDA tabs to triangulate what the market pays for similar growth/FCF profiles through a cycle.

Bottom Line

Deere’s product strength and ecosystem are real; the debate is timing and magnitude of the next upcycle. My SOTP-DCF triangulates a fair-value range of ~$227–$583 with a base near ~$357. If you think the company can normalize faster and sustain precision-driven mix, leaning in may be reasonable. If you prefer a margin of safety, waiting for clearer inflection (or dislocation) looks smarter.

My View

Deere is a high-quality cyclical with a secular precision tailwind. I respect the franchise, but I’d be selective on entrywhile guidance stays cautious. For long-term investors who admire the company, letting the cycle finish resetting—or demanding a better price—can skew the odds in your favor

Related News

Q3 FY2025 (Aug 14, 2025) — Worldwide net sales & revenues $12.02B, −9% YoY; Net sales $10.36B; Net income$1.289B (EPS $4.75). Company tightened FY2025 net-income outlook to $4.75B–$5.25B.– Official release (PDF): deere-3q25-earnings-release.pdf. John Deere– PR summary: “Deere Reports Third Quarter Net Income of $1.289 Billion.” PR Newswire– Coverage: “Deere Lowers Profit Outlook…” (Investopedia). Investopedia– Coverage: Reuters recap of the outlook cut. Morningstar

Q2 FY2025 (May 15, 2025) — Worldwide net sales & revenues $12.763B, −16% YoY; Net sales $11.171B; Net income$1.804B (EPS $6.64). Company trimmed the lower end of FY2025 net-income guidance.– Official release (PDF): deere-2q25-earnings-release.pdf. John Deere– Coverage: Reuters — “beats on cost cuts, trims outlook.” Reuters– Coverage: Investopedia “Just the numbers” recap. Investopedia

FY2024 baseline (Nov 21, 2024) — Worldwide net sales & revenues $51.716B (−16% YoY); Net sales $44.759B; FY2024 net income $7.1B.– Official FY2024 release (PDF). John Deere– 2024 Form 10-K (SEC) with segment tables & share counts. SEC+1

Additional context — Several outlets highlighted the segment declines (PPA, Small Ag & Turf, Construction & Forestry) and the tighter FY2025 range.– Yahoo/FinanceWire summaries: Q2/Q3 headlines & numbers. Yahoo Finance+1– Investing.com quick take on Q3 revenue & profit down.