Can GlaxoSmithKline Move Higher?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $55, is GSK an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

GlaxoSmithKline is global healthcare group engaged in the discovery, development, manufacturing, and marketing of pharmaceutical products. These products are vaccines, over-the-counter medicines, and health-related consumer products. GlaxoSmithKline’s principal pharmaceutical products are medicines in these areas: respiratory, antivirals, central nervous system, cardiovascular and urogenital, metabolic, antibacterials, oncology and emesis, dermatology, rare diseases, immuno-inflammation, vaccines, and HIV.

GlaxoSmithKline’s executives saw smaller bonuses this year due primarily to the aftermath of a massive corruption scandal in China. The scandal has led to a Chinese investigation, which began in July, regarding bribery allegations against the company, the Guardian reports. Chief Executive Andrew Witty collected 1.9 million pounds ($3.18 million) in salary for 2013. All total, Witty received a pay and shares package of 6.5 million pounds, collecting approximately 3.5 million pounds in share awards and 67,000 pounds in benefits.

The company’s remuneration committee, however, decided against awarding him the maximum possible bonus of 2.12 million pounds as a result of the Chinese bribery scandal. Despite the scandal, Witty’s annual pay and shares package almost doubled in 2013; the chief executive received 6.5 million pounds in 2013, up from approximately 3.9 million pounds in 2012.“ Both Sir Andrew and the board are mindful of the impact this issue has had on the reputation of the company,” said Tom de Swaan, chair of the board’s remuneration committee in a statement, per the Guardian. “As a result, the bonuses awarded for 2013 were lower than they otherwise might have been.”

T = Technicals on the Stock Chart Are Strong

GlaxoSmithKline stock has trended higher in the past several years. The stock is currently trading sideways and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, GlaxoSmithKline is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

GSK

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of GlaxoSmithKline options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

GlaxoSmithKline options

17.25%

26%

23%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Flat

Average

May Options

Flat

Average

As of Monday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on GlaxoSmithKline’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for GlaxoSmithKline look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

111.07%

-12.65%

-66.67%

-28.21%

Revenue Growth (Y-O-Y)

270.39%

-1.86%

-34.8%

-7.2%

Earnings Reaction

1.55%

-0.11%

0.38%

0.01%

GlaxoSmithKline has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with GlaxoSmithKline’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has GlaxoSmithKline stock done relative to its peers – Pfizer (NYSE:PFE), Merck (NYSE:MRK), Novartis (NYSE:NVS) — and sector?

GlaxoSmithKline

Pfizer

Merck

Novartis

Sector

Year-to-Date Return

3.99%

4.15%

12.23%

1.03%

6.35%

GlaxoSmithKline has been an average performer, year-to-date.

Conclusion

GlaxoSmithKline is a healthcare group that engages in many aspects of the pharmaceutical business around the world. The company’s executives saw smaller bonuses this year than “they might otherwise have been” due primarily to the aftermath of a massive corruption scandal in China. The stock has trended higher in recent years but is currently trading sideways. Over the past four quarters, investors have been pleased, as earnings and revenue figures have been on the rise. Relative to its peers and sector, GlaxoSmithKline has been an average year-to-date performer. Look for GlaxoSmithKline to OUTPERFORM.

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