Deere & Company Q2 Preview: Margin Strength Meets Demand Uncertainty as Tariff Concerns Persist

Deere & Company (NYSE: DE), the industrial bellwether in agriculture and construction machinery, is set to report fiscal Q2 2025 earnings before the bell on Thursday, May 15. The report arrives at a critical moment for the broader industrial sector, as persistent inflation, low commodity prices, and tariff-driven uncertainty have pressured farmer sentiment and global equipment demand. While DE has maintained operational discipline and strong profitability, investors remain concerned about the durability of its earnings outlook in the face of collapsing large equipment demand and dealer destocking.

Key Metrics and Expectations

Wall Street expects Q2 EPS of $5.62 on revenue of $10.79 billion, reflecting steep year-over-year declines of 33% and 29%, respectively. DE’s prior guidance calls for FY25 net income between $5.0 billion and $5.5 billion, and management previously reaffirmed its outlook for net sales declines of 15%-20% in Production & Precision Ag, ~10% in Small Ag & Turf, and 10%-15% in Construction & Forestry. The company also projected $750 million in net income from its Financial Services segment, which has been a bright spot amid the broader sales slump.

Analyst models suggest Q2 Equipment revenue will fall 21% to $10.7 billion with EPS closely tracking consensus at $5.59. The consensus reflects caution with 11 downward EPS revisions in the past 60 days and implies that Q2 will likely be the trough in earnings this cycle. Investors will be watching closely for commentary around FY25 guidance—any further narrowing or downward revisions would raise questions about whether the bottom has truly been reached.

Q1 Recap: Sharp Declines Tempered by Cost Control

In Q1, Deere reported a sharp top-line miss, with net sales dropping 30% to $8.51 billion and net income down 50% to $869 million, or $3.19 per share. Notably, every equipment segment posted double-digit sales and margin declines:

• Production & Precision Ag sales fell 37% to $3.07 billion with operating margin dropping to 11% from 21.6%.
• Small Ag & Turf sales fell 28%, while margins slid to 7.1% from 13.4%.
• Construction & Forestry was hit hardest, with sales down 38% and margins collapsing to 3.3% from 17.6%.

Despite the magnitude of the pullback, DE managed to preserve profitability through pricing actions and cost discipline, with Financial Services income rising 11% to $230 million. The company stuck to its FY25 guide, signaling confidence in a second-half rebound driven by seasonal demand and operational efficiencies.

Tariff Exposure: Contained But Still a Risk

Management has noted that tariffs on Chinese imports are expected to have an "immaterial" impact, as only 2% of U.S. manufacturing cost of goods sold comes from China and 1% from Canada. However, 10% of U.S. production inputs come from Mexico, which could become a flashpoint should U.S.-Mexico trade tensions escalate further. While DE has largely sidestepped the worst of the tariff fallout, investor concern remains elevated, particularly given the fragile backdrop of retaliatory measures on U.S. ag exports.

Investor Focus Areas for Q2

There are two central questions for investors:

• How bad will the top-line hit be? After a near $1 billion revenue miss in Q1, any further downside in Q2 could trigger a reevaluation of the FY25 outlook.
• Will DE revise its guidance? The full-year forecast of $5.0–$5.5 billion in net income is under scrutiny. If weakening ag demand or margin pressures persist, a downward revision could follow.

Investors are also paying attention to margin resilience, particularly whether DE can maintain its 30% incremental margin target as seasonal deliveries flow through. Additionally, dealer inventory levels, order trends in Precision Ag, and Construction & Forestry demand will be focal points.

Valuation and Sentiment

DE shares have gained 18% YTD and currently trade at approximately 25x forward earnings—well above its five-year average and peer median. This premium is difficult to justify in light of shrinking revenue and earnings. DE’s PEG ratio is more than 100% above sector averages, and both EBIT and top-line growth are negative YoY.

Despite this, analysts remain cautiously optimistic. Citi raised its price target to $480 from $430, viewing FY25 as a trough year and citing improving assumptions on volume and tax rates. Goldman Sachs is more constructive, lifting its target to $583 and citing structural tailwinds in ag subscription services and long-term secular earnings potential.

Conclusion

Deere remains one of the most profitable industrial names, with 13% net income margins and 28% ROE. But fundamentals are deteriorating, and the path to a second-half recovery depends heavily on margin execution and stabilization in equipment demand. If DE can deliver against lowered expectations and reaffirm its FY25 guide, shares could hold their premium. But any cracks in that foundation—especially on guidance—could prompt a re-rating.

All eyes will be on tomorrow’s release.