Can GlaxoSmithKline Break Higher?

With shares of GlaxoSmithKline (NYSE:GSK) trading around $53, 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 said sales in China, where the company is facing a bribery probe, have improved since the third quarter, when drug revenue plunged 61 percent from a year earlier. “The trend is definitely looking a bit more positive” since the quarter ended September 30, Chief Financial Officer Simon Dingemans said in an interview in San Francisco at JPMorgan Chase & Co.’s (NYSE:JPM) healthcare conference. “We can see the future opportunities to rebuild the business as and when we get to the other side of the inquiry. We’ll be working hard in 2014 to deliver that.” Allegations by China’s government that Glaxo bribed hospitals, doctors, and officials drove sales to some competitors with similar products, Chief Executive Officer Andrew Witty said in October. The London-based company has conducted a review of its operations in other emerging markets and implemented additional anti-bribery controls and measures in higher-risk countries, Dingemans said. “So far, we see this situation confined to China,” he said.

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. 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 above its rising key averages, which signal neutral to bullish 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

17.89%

93%

90%

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

Put IV Skew

Call IV Skew

February Options

Flat

Average

March Options

Flat

Average

As of today, there is an 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 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 = Weak 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

-0.21%

1.86%

4.94%

0.67%

2.81%

GlaxoSmithKline has been a poor 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 said sales in China have improved since the third quarter, when drug revenue plunged 61 percent from a year earlier. 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 a poor year-to-date performer. WAIT AND SEE what GlaxoSmithKline does this coming quarter.

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