Is Vivus Undervalued?

With shares of Vivus (NASDAQ:VVUS) trading around $12, is VVUS 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

Vivus, a biopharmaceutical company, engages in developing and commercializing therapies to address unmet needs in obesity, sleep apnea, diabetes, and sexual health. The company offers Qsymia, a drug for the treatment of obesity as an adjunct to a reduced-calorie diet and increased physical activity for chronic weight management in adult patients and Stendra, for the treatment of erectile dysfunction. The research and products Vivus provides are seeing a growing demand in the United States which should translate to increased profits for the company.

T = Technicals on the Stock Chart are Mixed

Vivus stock has seen a good amount of movement over the last several years. The stock broke above key resistance levels and soared higher but is now back at the critical breakout level. 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, Vivus is trading around its tangled key averages which signal neutral price action in the near-term.

VVUS

(Source: Thinkorswim)

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

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Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Vivus Options

59%

6%

8%

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

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish 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 bearish 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 Decreasing 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 Vivus’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Vivus look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-337.11%

-300%

-20%

-66.67%

Revenue Growth (Y-O-Y)

1970%

400%

0%

0%

Earnings Reaction

-12.24%

-20.93%

-4.22%

-3.39%

Vivus has seen decreasing earnings and increasing revenue over the last four quarters. From these figures, the markets have not been pleased with Vivus’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Vivus stock done relative to its peers, Eli Lilly (NYSE:LLY), GlaxoSmithKline (NYSE:GSK), Pfizer (NYSE:PFE), and sector?

Vivus

Eli Lilly

GlaxoSmithKline

Pfizer

Sector

Year-to-Date Return

-8.42%

14.05%

18.63%

21.55%

25.63%

Vivus has been a relative underperformer, year-to-date.

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Conclusion

Vivus researches, develops, and manufactures pharmaceutical products that may have a very positive impact on the lives of many consumers worldwide. The stock has recently broken above key levels but has returned to test these price levels once again. Over the last four quarters, earnings and revenue numbers have not pleased investors. Relative to its peers and sector, Vivus has trailed, in year-to-date performance, by a wide margin. STAY AWAY from Vivus for now.

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