Is Novartis a Buy after Earnings?

With shares of Novartis (NYSE:NVS) trading around $73, is NVS 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

Novartis engages in the research, development, manufacture, and marketing of a range of healthcare products worldwide. Its portfolio includes medicines, eye care, cost-saving generic pharmaceuticals, preventive vaccines and diagnostic tools, over-the-counter drugs, and animal health products. The company operates in five business segments: Pharmaceuticals, Alcon, Sandoz, Vaccines and Diagnostics, and Consumer Health. Its core products and services include prescription medicines; surgical, ophthalmic pharmaceutical, and vision care products; generic pharmaceuticals,  human vaccines, and blood-testing diagnostics; as well as over-the-counter medicines and animal health. In a growing healthcare field, Novartis provides key products and services.

Recently, Novartis has raised its full-year outlook, after finding out a generic version of its best-selling blood pressure medication Diovan would be delayed. Second-quarter income and revenue for the company beat analyst estimates, but earnings per share fell short. However, Novartis is also being cautious about 2014, as the generic version of Diovan may be available by then.

T = Technicals on the Stock Chart are Strong

Novartis stock has been on a bullish run over the last several months. The stock is now consolidating near all-time high prices, and it may need a little time before its next move. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Novartis is trading slightly above its rising key averages, which signal neutral to bullish price action in the near-term.

NVS

(Source: Thinkorswim)

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

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Novartis Options

16.76%

0%

0%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, 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 very small 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 what that means for Novartis’s stock.

E = Earnings Are Mixed Quarter-Over-Quarter

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

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

5.80%

5.43%

73.16%

-0.99%

Revenue Growth (Y-O-Y)

-0.36%

2.11%

0.48%

-6.62%

Earnings Reaction

-0.52%*

-1.02%

3.38%

-0.42%

Novartis has seen improving earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have expected a little more from Novartis’s recent earnings announcements.

* As of this writing

P = Average Relative Performance Versus Peers and Sector

How has Novartis stock done relative to its peers, Pfizer (NYSE:PFE), Merck  (NYSE:MRK), GlaxoSmithKline (NYSE:GSK), and the overall sector?

Novartis

Pfizer

Merck

GlaxoSmithKline

Sector

Year-to-Date Return

15.45%

14.48%

18.20%

19.58%

16.78%

Novartis has been an average relative performer, year-to-date.

Conclusion

Novartis is a healthcare company that provides a number of healthcare products and services to consumers and companies worldwide. Just recently, the company issued a positive earnings report, and offered good news for the rest of the year. The stock has been on a strong run, and is now consolidating near all-time high prices. Over the last four quarters, earnings have been improving, while revenue figures have been mixed, which has resulted in confused investors. Relative to its peers and sector, Novartis has been an average year-to-date performer. Look for Novartis to OUTPERFORM.

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