Is GlaxoSmithKline an Attractive Investment?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $51, 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 is investing early in India’s booming pharmaceutical market. The company announced that it is initiating a $1 billion voluntary open offer for a higher stake in its Indian drug unit, GlaxoSmithKline Pharmaceuticals Ltd. GlaxoSmithKline PLC, the British unit of the company, sees a huge surge in the demand for pharmaceuticals in the Indian market, one that PricewaterhouseCoopers estimates as being worth $12 billion, all told. The move would increase the British unit’s ownership of its Indian subsidiary to nearly 75 percent, up from 50.1 percent previously, according to a Glaxo press release.

T = Technicals on the Stock Chart Are Strong

GlaxoSmithKline stock has trended higher in the past several years. The stock is currently trading near highs for the year and looks set to continue this path. 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 signal neutral 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

15.50%

36%

33%

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

January Options

Average

Average

February Options

Average

Average

As of today, 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 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 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-12.65%

-66.67%

-28.21%

-26.92%

Revenue Growth (Y-O-Y)

-1.86%

-34.80%

-7.20%

-1.91%

Earnings Reaction

-0.11%

0.38%

0.01%

0.73%

GlaxoSmithKline has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic 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), Novartis (NYSE:NVS), and sector?

GlaxoSmithKline

Pfizer

Merck

Novartis

Sector

Year-to-Date Return

17.09%

20.39%

10.11%

21.44%

18.25%

GlaxoSmithKline has been an average 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 is investing early in India’s booming pharmaceutical market. The stock has trended higher in recent years and is currently trading near highs for the year. Over the past four quarters, investors have been optimistic, as earnings and revenue figures have been declining. Relative to its peers and sector, GlaxoSmithKline has been an average year-to-date performer. WAIT AND SEE what GlaxoSmithKline does this coming quarter.

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