Can GlaxoSmithKline’s Slumping Stock Recover?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $50, 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 reported results for the second quarter of its 2014 fiscal year on Wednesday, causing the stock to decline in pre-market trading. For the quarter, the company reported revenues of $9.4 billion, 3.3 percent short of analysts’ expectation of $9.8 billion. Earnings for the quarter were $2.39 billion, or 65 cents per share, missing expectations of 73 cents per share.

T = Technicals on the Stock Chart Are Mixed

GlaxoSmithKline stock has struggled to make significant progress in recent times. The stock is currently pulling back 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 between its rising key averages, which signals neutral price action in the near-term.

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

15.11%

26%

24%

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

August Options

Average

Average

September Options

Average

Average

As of Thursday, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral 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?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

-30.75%

-25.56%

111.07%

-12.65%

Revenue Growth (Y-O-Y)

-7.95%

-7.66%

270.39%

-1.86%

Earnings Reaction

-5.97%

-1.81%

1.55%

-0.11%

GlaxoSmithKline has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about GlaxoSmithKline’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

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

GlaxoSmithKline

Pfizer

Merck

Novartis

Sector

Year-to-Date Return

-6.26%

-0.78%

16.1%

10.75%

5.95%

GlaxoSmithKline has been a poor relative performer, year-to-date.

Conclusion

GlaxoSmithKline is a healthcare group that engages in many aspects of the pharmaceutical business around the world. The company on Wednesday reported second-quarter earnings that came in short of analysts’ expectations. The stock has struggled to make significant progress in recent times and is currently pulling back. Over the past four quarters, earnings and revenue figures have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, GlaxoSmithKline has been a poor year-to-date performer. WAIT AND SEE what GlaxoSmithKline does next.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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