Deere & Co. (DE) Q1 2026: Construction Order Bank Surges 50%, Signaling Cycle Bottom

2026-02-19 | By EarningsIQ Research

Deere’s Q1 results mark a pivotal inflection, with broad-based segment outperformance and a 50% jump in construction order backlog providing rare visibility into the second half of 2026. While large ag remains pressured, stabilization in North America and accelerating tech adoption point to a bottoming of the cycle. Management’s guidance lift and continued investment in smart machines and digital platforms position Deere for durable recovery as end markets regain momentum.

Summary

• Order Book Visibility: Construction and forestry backlog rose over 50%, extending demand clarity into late 2026.
• Segment Diversification: Small ag and turf, along with construction, delivered 20%+ top-line growth, offsetting large ag softness.
• Cycle Bottom Thesis: Management signals 2026 as the trough, with improving channel health and product launches setting up recovery.

Performance Analysis

Deere delivered a robust Q1, with total equipment operations net sales up 18% year-over-year, driven by strong shipment volumes and positive foreign currency translation across all segments. Small ag and turf, as well as construction and forestry, each posted over 20% top-line growth, while production and precision ag (PPA) saw a modest 3% lift, primarily from currency effects.

Operating margins were pressured by higher tariffs and unfavorable mix in large ag, but cost discipline and production efficiencies—particularly in construction—helped offset these headwinds. The construction and forestry segment more than doubled operating profit year-over-year, while small ag and turf margins improved on volume and pricing. Financial services net income also increased, buoyed by favorable financing spreads and lower credit loss provisions.

• Cost Leverage and FX Tailwind: All segments benefited from operational efficiencies and a weaker U.S. dollar, supporting both sales and margin resilience.
• Tariff Burden Remains Material: Tariffs are set to reach $1.2 billion for the year, but are largely offset by pricing and cost controls.
• Inventory Management: Used equipment levels, especially in North America, declined sharply, improving channel health and supporting future replacement demand.

Deere’s ability to outperform expectations across segments and maintain disciplined inventory positions reinforces its through-cycle execution strength, even as large ag remains cyclically weak.

Executive Commentary

Strategic Positioning

1. Diversified Portfolio Offsets Large Ag Weakness

Deere’s multi-segment model—combining large ag, small ag and turf, and construction—proved resilient, as construction and small ag outpaced expectations and compensated for continued large ag softness. This diversification mitigates exposure to any single end market’s volatility, providing stability through cycles.

2. Construction and Forestry: Structural Tailwinds and Digital Expansion

Construction and forestry (CNF) is now Deere’s growth engine, with order bank up 50% and demand visibility into late 2026. Government infrastructure spending, data center buildouts, and rental fleet refreshes are driving broad-based demand. The acquisition of Tenna, a fleet management and jobsite optimization platform, deepens Deere’s digital capabilities and positions CNF for leadership in mixed-fleet, tech-enabled construction.

3. Large Ag: Signs of Stabilization and Tech Adoption

While large ag remains challenged by soft commodity prices and cautious farmer sentiment, Deere is seeing stabilization in North America—order velocity for tractors has picked up, and used inventory levels have declined sharply. Tech attachment rates are rising, with 99% of new combines ordered featuring harvest automation, and “ultimate package” adoption up year-over-year. This signals a gradual shift toward higher-value, tech-driven sales as the cycle turns.

4. Pricing and Cost Management in a Tariff Environment

Deere is managing pricing with surgical precision, balancing competitive pressures and regional incentives, especially in South America. Despite $1.2 billion in tariff headwinds, the company expects to remain price-cost neutral for the year, leveraging operational efficiencies and disciplined overhead spending.

5. Capital Allocation and Product Innovation

Deere continues to invest in smart machines, digital platforms, and product launches—such as the new Deere-designed 20-ton excavator—while returning $750 million to shareholders in Q1. This dual focus on innovation and capital return underpins Deere’s long-term value creation strategy.

Key Considerations

This quarter, Deere’s execution and strategic positioning highlight several factors that will define its trajectory through the cycle bottom and into recovery:

Key Considerations:

• Construction Order Bank Momentum: The 50% surge in construction and forestry backlog signals sustained demand and improved production planning visibility.
• Channel Health in Large Ag: Used inventory reductions and aging fleets set the stage for replacement demand as fundamentals stabilize.
• Technology Penetration: Rapid adoption of automation and digital solutions in both ag and construction is driving higher-value sales and customer lock-in.
• Tariff and Cost Management Discipline: Despite a $1.2 billion tariff drag, Deere’s price-cost neutrality and operational efficiency are protecting margins.
• Capital Allocation Balance: Continued investment in innovation alongside robust shareholder returns demonstrates confidence in through-cycle cash generation.

Risks

Deere remains exposed to cyclical downturns in large ag, with North American industry sales still forecast to decline 15% to 20% in 2026. Tariff volatility, especially around Section 232 steel and IEPA, introduces ongoing cost unpredictability, and any delay in relief could pressure future pricing flexibility. South American ag remains cautious, with high interest rates and currency swings weighing on demand, while competitive pressures in construction may limit pricing power if industry capacity exceeds demand.

Forward Outlook

For Q2 and the remainder of 2026, Deere guided to:

• Mid-single-digit net sales growth for equipment operations
• Production and precision ag net sales down 5% to 10%, with 11% to 13% operating margin
• Small ag and turf net sales up 15%, with 13.5% to 15% margin
• Construction and forestry net sales up 15%, with 9% to 11% margin

For full-year 2026, management raised guidance to:

• Net income of $4.5 billion to $5 billion
• Equipment operations cash flow of $4.5 billion to $5.5 billion

Management highlighted:

• Stabilization of large ag fundamentals and improving used equipment markets
• Strong construction order books and visibility into the second half

Takeaways

Deere’s Q1 marks a cycle bottoming quarter, with diversified growth, operational discipline, and digital innovation offsetting ag market headwinds.

• Broad-Based Outperformance: All segments delivered above-plan results, with construction and small ag driving top-line and margin strength.
• Visibility and Channel Health: Order books and inventory positions provide rare clarity, supporting management’s recovery thesis.
• Tech and Digital Leverage: Rising tech attachment rates and digital platform expansion position Deere for higher-margin, recurring revenue as markets recover.

Conclusion

Deere’s Q1 2026 results underscore its ability to execute through the cycle, with segment diversification, operational discipline, and digital investment setting the stage for recovery. With construction order strength and stabilizing ag channels, Deere is positioned to capitalize as end markets recover and customers prioritize productivity and technology.

Industry Read-Through

Deere’s construction backlog surge and digital platform expansion signal a broader industry shift toward tech-enabled, productivity-focused solutions, especially as infrastructure and data center investments accelerate. Ag machinery peers face similar cyclicality, but those with diversified portfolios and digital offerings are best positioned for recovery. Persistent tariff and cost volatility will remain a sector-wide challenge, but disciplined inventory and channel management are emerging as key differentiators for OEMs. Investors should watch for further consolidation of digital platforms and increasing tech adoption rates across both ag and construction verticals.

DE Industrials Agricultural Machinery Construction Digitalization Tariffs Smart Machines