Where Will Elan Go Next?

With shares of Elan (NYSE:ELN) trading around $15, is ELN 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

Elan is a biotechnology company that is focused on discovering and developing advanced therapies in neurodegenerative and autoimmune diseases. Such diseases include Alzheimer’s Disease, Parkinson’s Disease, Celiac disease, Crohn’s Disease, and Narcolepsy. As these diseases take a toll on many lives, any positive progress Elan can make will be very rewarding. As many of these diseases come to the attention of people around the world, biotechnology companies such as Elan will see rising demand.

Just recently, it was announced that Perrigo (NASDAQ:PRGO) will purchase the Irish pharmaceutical company, Elan, for $8.6 billion in order to take advantage of Ireland’s lower tax rates. Perrigo’s corporate income tax rate will drop from 30 percent to 12.5 percent by re-domiciling in Ireland. According to Perrigo, the deal will save the company $150 million a year in taxes.

T = Technicals on the Stock Chart are Strong

Elan stock has been rising over the last several months. The stock is now trading at highs for the year, and at prices not seen since 2008. 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, Elan is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

ELN

(Source: Thinkorswim)

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

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Elan Options

18.18%

86%

83%

What does this mean? This means that investors or traders are buying a very significant 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 significant 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 the conclusion.

E = Earnings Are Mixed 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 Elan’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Elan 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)

78.42%

-20.00%

-452.69%

-133.33%

Revenue Growth (Y-O-Y)

900.00%

27350%

13.37%

9.74%

Earnings Reaction

4.46%

-0.75%

-10.13%

-0.28%

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

P = Excellent Relative Performance Versus Peers and Sector

How has Elan stock done relative to its peers, Pfizer (NYSE:PFE), Sanofi (NYSE:SNY), Biogen Idec (NASDAQ:BIIB), and sector?

Elan

Pfizer

Sanofi

Biogen Idec

Sector

Year-to-Date Return

51.52%

17.87%

11.27%

48.91%

24.19%

Elan has been a relative performance leader, year-to-date.

Conclusion

Elan is a biotechnology company that is looking for ways to improve and better the lives of people with disruptive diseases. The company is now set to be bought-out by Perrigo. The stock has been rising over the last several months, and is now trading at prices not seen for five years. Over the last four quarters, investors have had mixed feelings about the company, as earnings have been mixed, while revenue figures have been improving. Relative to its peers and sector, Elan has been a year-to-date performance leader. Look for Elan to OUTPERFORM.

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