Deere Is Up 45% This Year, but the Hard Proof Hasn't Shown Up Yet

Deere & Company, the world's largest farm-equipment maker, is trading near an all-time high of about $706 after climbing more than 50% off last year's low. And it is doing it in the middle of the worst stretch its core business has seen in years. The question is whether the market has already paid for the improvement before the company has actually produced it.

A record high while the biggest business shrinks

Start with the contradiction. The part of Deere that makes large tractors and combines — the big-ticket machines that anchor the whole franchise — keeps shrinking. Management expects fiscal 2026 sales of large ag equipment in the United States, Canada, and South America to fall 15 to 20 percent and the wider production and precision agriculture unit to decline about 10% for the full year. That is a genuine downturn in the company's flagship business.

Yet the stock has done the opposite of the business: it is up roughly 45% this year and about 20% over the past four months, trading at roughly 34 times the next year's expected earnings.

The reason is that Deere is really two companies stitched into one. The legacy tractor business is in a downturn, but the other limbs of the machine are thriving. In the quarter ended August 2, construction and forestry sales grew 18%, powered by what management describes as infrastructure, data-center, and energy demand — the so-called AI building boom — with that segment's backlog stretching into fiscal 2027. The smaller agriculture and turf business grew 12%, helped by healthy dairy and livestock demand. So one leg is shrinking toward what management hints is a bottom, while another is running hot.

The leverage that isn't what it looks like

This is where "leverage" enters the picture, in two different senses that are easy to confuse.

The first is operating leverage, and it is real. Deere runs a factory-heavy cost structure, so when construction volume jumps 18%, a disproportionate share of that revenue drops toward profit. That is why the whole equipment business could still post a 14.4% operating margin in the quarter even as its biggest product line sagged. This is a company that earns impressive margins in a downturn, and that alone has been enough to re-rate the stock.

The second kind of leverage is the number on the balance sheet, and it is mostly a mirage for an industrial company. Deere's consolidated books look heavy: around $79.6 billion of total debt and roughly $53.6 billion net of cash, a debt-to-equity ratio above two. But the overwhelming share of that debt belongs to Deere's captive finance arm — the in-house bank that lends farmers the money to buy its machines, the same structure General Motors or Ford use. Fitch Ratings puts the debt behind the actual factory business at only about $10.8 billionand reaffirms Deere's credit at A+ with a stable outlook. The scary leverage ratio is largely a banking structure, not an overextended balance sheet.

The proof that hasn't arrived

Here is the catch. The market has already re-priced Deere from a beaten-down farm stock into a construction/AI growth story, and it did most of that this year. That is the opposite of the setup a disciplined investor usually wants: the crowd has already found the inflection, so the room for surprise is gone until the numbers catch up.

The cash-flow test makes that plain. The metric that best separates hope from proof — free cash flow — has gone the wrong way: about $3.2 billion over the trailing twelve months, down 21% from a year earlier. Against a market capitalization near $182 billion, that is under a 2% cash yield. Even the cleaner equipment-operations number, which Deere just raised to a range of $5 billion to $5.5 billionfor fiscal 2026, is only about 3% of the market cap.

None of this makes Deere a bad business. It is clearly a better one than the beaten-down tractor stock of two years ago, with pricing power, healthy margins, and a boom leg that runs on data-center construction. But the style of investing that works here is buying improvement before the crowd prices it in. On Deere, that moment has passed: the multiple is high, and the hard proof in free cash flow has not arrived.

The bull case now rests on the cash actually showing up — equipment-operations cash flow inflecting higher, construction backlogs staying long, and, the biggest wildcard, large farmers returning to buy big iron. The mirror-image risk is that the data-center building cycle stalls or the free-cash-flow inflection fails to materialize, in which case 34 times earnings is a stiff price for a cyclical that has historically traded far cheaper.

I can be wrong — construction strength could run longer than anyone expects, and an ag turnaround could be closer than the headlines suggest. But the disciplined move here is not to chase a multiple the crowd has already built. It is to let Deere's free cash flow earn the premium before you pay for it.