Will Recent News Hurt GlaxoSmithKline?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $52, 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.

The company is facing another criminal investigation, this time in Poland. The news comes after previous reports of similar bribery allegations in Iraq. Last year, the company came under fire for corruption charges at its Chinese unit as, well. The resulting investigation into the Chinese bribery charges has resulted in significant sales losses in that country for the company.

According to a report from BBC News published Sunday, 11 doctors and one GSK regional manager are facing corruption charges for actions undertaken between 2010 and 2012 in Poland. An ex-employee of the pharmaceutical giant says that doctors were paid bribes to recommend GlaxoSmithKline’s asthma drug, Seretide, over competing brands. The company said that it is cooperating with the investigation and that one employee has already been disciplined.

T = Technicals on the Stock Chart Are Mixed

GlaxoSmithKline stock has trended higher in the past several years. The stock is currently moving higher and looks set to continue. 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 slightly below its rising key averages, which signals neutral to bearish 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

19.21%

57%

55%

What does this mean? This means that investors or traders are buying a significant 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 Tuesday, there is 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 significant 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 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 had mixed feelings about 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), and Novartis (NYSE:NVS) — and sector?

GlaxoSmithKline

Pfizer

Merck

Novartis

Sector

Year-to-Date Return

-3.05%

-3.2%

10.29%

3.17%

2.8%

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 is facing another criminal investigation in Poland. The stock has trended higher in recent years and looks set to continue. Over the past four quarters, earnings and revenue figures have been on the rise. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, GlaxoSmithKline has been an average year-to-date performer. WAIT AND SEE what GlaxoSmithKline does next.

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