Is Deere's Rising Valuation Justified Amid Cyclical Downturns?

The agricultural and construction equipment giant Deere & Co. (NYSE: DE) has seen its stock price rise despite a backdrop of weak earnings, industry headwinds, and macroeconomic volatility. This divergence between market sentiment and financial fundamentals raises a critical question: Is Deere's valuation justified in a cyclical downturn, or is the stock trading at a premium disconnected from its earnings trajectory and debt profile?

A Tale of Two Narratives: Growth Optimism vs. Earnings Realities

Deere's recent financial performance tells a story of mixed signals. While its debt-to-equity ratio has improved significantly, dropping from 379.4% to 265.2% over five yearsDeere (DE) Balance Sheet & Financial Health Metrics^[1], the company's earnings per share (EPS) have shown a sharp decline. In 2024, Deere's annual EPS fell to $25.62, a 26% drop from its 2023 peak of $34.63Deere EPS - Earnings per Share 2010-2025 | DE^[3]. For the quarter ending April 30, 2025, EPS plummeted further to $6.64Deere EPS - Earnings per Share 2010-2025 | DE^[3], signaling persistent pressure from inflationary input costs and soft demand in key markets.

Yet, despite these bearish indicators, Deere's stock has defied gravity. This disconnect hints at a bullish narrative centered on long-term growth expectations—particularly in automation, sustainability, and emerging markets. However, historical data from cyclical industries suggests such optimism may be misplaced. For instance, during periods of macroeconomic stress, companies like Resideo (REZI) and JELD-WEN have traded at forward P/E ratios as low as 11.36 and 18.5, respectivelyDeere (DE) Balance Sheet & Financial Health Metrics^[1], reflecting a market prioritizing short-term survival over speculative growth.

Valuation Misalignment: A Cyclical Benchmark

Cyclical firms typically see their valuation multiples compress during downturns as investors prioritize cash flow stability over future potential. In July 2025, amid surging Producer Price Index (PPI) and input costs, THOR Industries (THO)—a leader in recreational vehicles—traded at a forward P/E of 27.05Deere (DE) Balance Sheet & Financial Health Metrics^[1], a premium to its peers but still below Deere's implied multiples. If Deere were to trade at a similar P/E, its valuation would suggest a market capitalization significantly lower than its current level.

Deere's interest coverage ratio of 55.1xDeere (DE) Balance Sheet & Financial Health Metrics^[1]—a measure of its ability to meet debt obligations—appears robust. However, this metric masks the company's exposure to cyclical demand swings. Unlike defensive sectors, Deere's revenue is tied to capital expenditures in agriculture and construction, which contract sharply during economic slowdowns. For example, during the 2008 financial crisis, Deere's EPS dropped by over 50% within a yearDeere (NYSE:DE) - Earnings & Revenue Performance^[4], illustrating the fragility of its earnings model.

The Debt Conundrum: Progress or Illusion?

While Deere's debt-to-equity reduction is a positive step, it must be contextualized. The company's average annual EPS growth of 13% over five yearsDeere (NYSE:DE) - Earnings & Revenue Performance^[4] has been driven by periods of strong commodity prices and pent-up demand in agriculture. However, with global grain markets stabilizing and construction activity slowing, the sustainability of this growth is questionable.

Moreover, Deere's leverage improvements come at a time when interest rates are near multi-decade highs. A 265.2% debt-to-equity ratio still implies significant financial risk, particularly if borrowing costs rise further. By contrast, cyclical peers like JELD-WEN—trading at a P/E of 18.5Deere (DE) Balance Sheet & Financial Health Metrics^[1]—have adopted more conservative balance sheet strategies, prioritizing liquidity over aggressive debt reduction.

Diverging Paths: Bulls vs. Bears

The current valuation debate hinges on two competing narratives:
1. Bullish Case: Deere's innovation pipeline, including autonomous machinery and digital farming solutions, positions it to outperform in a post-downturn recovery. Investors may be pricing in a “first-mover” advantage in sustainability-driven markets.
2. Bearish Case: Historical cyclical patterns suggest that Deere's valuation multiples are inflated relative to its earnings trajectory. With EPS declining and input costs rising, the stock may be overvalued if the industry remains in contraction.

Conclusion: A High-Stakes Bet on the Future

Deere's valuation appears to reflect a market betting on a swift industry rebound rather than its current financial realities. While the company's debt reduction and interest coverage are commendable, they do not offset the risks of a prolonged cyclical downturn. For investors, the key question is whether Deere's innovation pipeline can offset near-term earnings declines—or if the stock is being priced for a recovery that may not materialize.

In a market where cyclical firms typically trade at discounts during downturns, Deere's premium valuation stands out as an outlier. This misalignment may persist if macroeconomic conditions improve, but it also exposes the stock to sharp corrections should growth expectations fail to meet the hype.