Can GlaxoSmithKline Continue to Rise?

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 health care 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 had previously apologized for bribery practices at its Chinese operations and blamed the acts on a few employees in the company’s China business. Now, Chinese state media are saying the practice was orchestrated by the British company and was not the work of a few employees, Reuters reports. Some detained GSK executives in the country said the company set sales goals that would be impossible to fulfill without the use of bribery. So far, GSK officials have not commented on the accusations.

T = Technicals on the Stock Chart Are Mixed

GlaxoSmithKline stock has trended higher in the past several years. However, the stock has been stuck in a range for most of the current year. 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 key averages, which signals neutral price action in the near term.

GSK

Source: Thinkorswim

Taking a look at the implied volatility 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

16.62%

26%

25%

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 past 30 and 90 trading days.

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of Monday, 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 significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-66.67%

-28.21%

-26.92%

-15.12%

Revenue Growth (Y-O-Y)

-34.80%

-7.20%

-1.91%

-6.99%

Earnings Reaction

0.38%

0.01%

0.73%

-0.99%

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

GlaxoSmithKline

Pfizer

Merck

Novartis

Sector

Year-to-Date Return

17.87%

14.48%

17.97%

18.97%

15.83%

GlaxoSmithKline has been an average relative performer, year to date.

Conclusion

GlaxoSmithKline is a health care group that engages in many aspects of the pharmaceutical business around the world. The company continues to be plagued by bribery allegations in China. The stock has trended higher in recent years — however, it has been stuck in a range for most of this year. Over the past four quarters, investors have been optimistic about the company, though 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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