Can GlaxoSmithKline Get Past Recent Headlines?

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 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 include 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 in 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 that 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 Strong

GlaxoSmithKline stock has moved higher in recent months. The stock is now consolidating slightly below highs for the year, but the company may need time before it makes its next move. 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 around its rising key averages, which signals neutral to bullish 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

20.69%

93%

90%

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

September Options

Steep

Average

October 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.

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 last four quarters. From these numbers, the markets have been pleased with GlaxoSmithKline’s recent earnings announcements.

P = Excellent 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

19.78%

12.50%

15.44%

18.58%

16.72%

GlaxoSmithKline has been a relative performance leader, 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 moved upward in recent times and is now consolidating below highs for the year. Over the last four quarters, earnings and revenues have been decreasing. However, investors have been pleased with what they’ve heard during earnings announcements. Relative to its peers and sector, GlaxoSmithKline has been a year-to-date performance leader. WAIT AND SEE what GlaxoSmithKline does at current prices.

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