Deere faces downturn with significant drop in sales

In the United States, on May 21, 2025, financial analysts observed a troubling trend for Deere & Co (DE), a leading agricultural equipment manufacturer. The company has been experiencing significant challenges, notably reflected in its recent financial results. Over the past six quarters, DE has reported declines in both revenue and earnings per share (EPS), raising concerns about the sustainability of its elevated valuation in the context of a decreasing demand for heavy machinery. Analysis indicates that DE's forward price-to-earnings (P-E) ratio stands at 28.1, significantly higher than the industry median of 17.8, which indicates that the stock is trading at a premium relative to its peers despite showing troubling revenue reports. This scenario is compounded by the agricultural sector facing macroeconomic headwinds and oversupply issues, affecting commodity prices and demand for agricultural equipment. In the most recent quarter, Deere reported a staggering 16% year-over-year decline in sales, with every business unit posting double-digit declines. Particularly notable was the 22% year-over-year drop in EPS, underlining the significant revenue pressures the company faces. The broader economic environment around agriculture has deteriorated, prompting speculation that the recent rally in DE's stock price may be nearing its end. Technically, the stock's performance reflected these concerns; the weekly Relative Strength Index (RSI) showed a bearish divergence. While DE stock hit a record high of $532.47, the RSI failed to confirm strength at those levels. Investors are increasingly wary, recognizing that the combination of a high valuation and declining sales may drive DE’s stock price down in the near future. To take advantage of this expected reversal, traders might consider bearish strategies. One suggested approach includes buying June 20, 2025, put options on DE to capitalize on potential declines. The trade entails buying a $530 put while simultaneously selling a $520 put, thus establishing a vertical spread. This strategy is positioned between a maximum reward of $552 if the stock is above $530 at expiration, while capping the risk at $448 if the stock is below $520 by the end of the option's life, thereby providing a calculated risk-reward scenario for traders anticipating a pullback. In summary, as growing evidence suggests a weakening demand for agricultural machinery alongside DE's declining sales figures, it seems prudent for investors to evaluate their positions carefully. The mix of declining economic fundamentals and overextended stock valuations creates a potentially precarious environment for the agricultural machinery market, particularly for companies like Deere.