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Chart Pattern Targets Double-Digit Gains for This Farm Equipment Stock

Melvin Pasternak

Hidden in the plethora of daily government statistics is one that could make you lots of money. The Commerce Department recently reported orders for capital goods, which include industrial machinery, construction equipment and computers, increased 6.3% in January. On a seasonally adjusted basis, demand specifically for new machinery rose 13.5% over the month.

The news helped boost machinery and construction equipment stocks in general. But one company in particular that is poised to benefit is the world's largest farm equipment producer, Deere & Co. (DE).

Rising U.S. demand is one of many catalysts for Deere. During the past 10 quarters, the company has reported consecutive record revenue and earnings. For the full 2012 year, DE achieved an all-time high of $32.6 billion in sales. With seven factories under construction in the coming years, management anticipates revenue will reach $50 billion by 2018.

Also driving Deere's growth is a focus on international expansion. With increased global food demand, Deere has found its place in economies like Brazil, China and India. In South America, sales are expected to increase 10% to 15% this year. Sales in Asia are estimated to increase slightly as well.

Although North American revenues are forecasted to only grow about 5% this year, the company offers innovative solutions to appeal to its audience. Farmers can now order tractors equipped with features like blue tooth wireless speakers and mini-fridges!

From a technical perspective, Deere stock is strong.

Deere Stock Chart

After hitting a late May 2012 low of $68.33, shares formed a major uptrend line. Since this time, the stock has risen approximately 33%. The technicals point to further upside ahead.

In late January 2013, Deere hit a multi-year high of $95.60, just under $100 round number resistance and at key historical resistance. This resistance dates back to mid-2011 when, in both March and May, the stock unsuccessfully challenged the $95 barrier and fell soon after.

Currently, shares are trading above important support near $87. This chart pivot point has been touched many times in the last two years and should remain a key level of buying interest.

Because shares have fallen from $95.60 resistance and remain above $87 support, the stock is at a potentially attractive entry point. Assuming $87 support holds, it is likely Deere should re-challenge $95.60 resistance. 

If the stock can break $95.60, then a rectangular pattern, marked by $87 support and $95.60 resistance, would be broken. The measuring principle for a rectangle is calculated by adding the height of the pattern to the breakout level and projects a target of $104.20 ($95.60-$87 = $8.60; $8.60+$95.60 = $104.20). At current levels, this target represents nearly 15% returns.

The bullish technical outlook is supported by strong fundamentals. For the upcoming quarter, scheduled to be reported May 14, analysts project revenue will increase 4.3% to $9.8 billion, from $9.4 billion in the comparable year-ago period. For fiscal year (FY) 2013, ending in October, analysts expect increased international demand for farm equipment will cause revenue to jump 5.8% to $35.4 billion, from $33.5 billion last year.

The earnings outlook is also upbeat. Based on anticipated sales of farm machinery, analysts estimate quarterly earnings will rise 3.8% to $2.71 per share, from $2.61 per share in the comparable year-ago quarter. For FY 2013, analysts' expect increased international demand for the company's farm equipment will cause earnings to increase 12.6% to $8.59 per share, from $7.63 per share last year.

In addition to a solid fundamental outlook, Deere stock is attractively valued based on its low trailing price-to-earnings (P/E) ratio of about 11. In comparison, the average P/E for the farm and construction industry is nearly double that at about 20.5.

The blue-chip company rewards shareholders with a modest annual forward dividend of about 2.1%, or $1.84 per share. Management just increased the dividend payout for the fifth time in three years. And Deere has maintained or increased its dividend for the past 17 years.

Risks to consider: Inclement weather, poor soil conditions, and a variety of other uncontrollable factors can affect crop yields, which can ultimately impact the money farmers have to spend on new machinery. However, Deere's focus on international expansion should mean poor conditions in one area of the world will not affect sales in another. This diversification should provide a safety net for the company, ensuring future growth.

Recommended Trade Setup:

-- Buy DE at the market price
-- Set stop-loss at $81.99, just below the major uptrend line
-- Set initial price target at $104.20 for a potential 15% gain in one year

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