Earnings

Dissecting the Numbers for Netflix, Inc. (NFLX) and Charter Communications, Inc. (CHTR)

Netflix, Inc. (NASDAQ:NFLX) shares are up more than 63.72% this year and recently increased 1.60% or $3.19 to settle at $202.68. Charter Communications, Inc. (NASDAQ:CHTR), on the other hand, is up 25.94% year to date as of 10/16/2017. It currently trades at $362.60 and has returned -0.94% during the past week.

Netflix, Inc. (NASDAQ:NFLX) and Charter Communications, Inc. (NASDAQ:CHTR) are the two most active stocks in the CATV Systems industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect NFLX to grow earnings at a 77.50% annual rate over the next 5 years. Comparatively, CHTR is expected to grow at a 25.40% annual rate. All else equal, NFLX’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 30.83% for Charter Communications, Inc. (CHTR). NFLX’s ROI is 5.00% while CHTR has a ROI of 6.10%. The interpretation is that CHTR’s business generates a higher return on investment than NFLX’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, NFLX’s free cash flow was -6.55% while CHTR converted 0% of its revenues into cash flow. This means that, for a given level of sales, CHTR is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. NFLX has a current ratio of 1.30 compared to 0.30 for CHTR. This means that NFLX can more easily cover its most immediate liabilities over the next twelve months. NFLX’s debt-to-equity ratio is 1.55 versus a D/E of 1.73 for CHTR. CHTR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

NFLX trades at a forward P/E of 95.38, a P/B of 28.11, and a P/S of 8.58, compared to a forward P/E of 48.70, a P/B of 2.61, and a P/S of 2.53 for CHTR. NFLX is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. NFLX is currently priced at a 4.02% to its one-year price target of 194.84. Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. NFLX has a beta of 1.40 and CHTR’s beta is 1.12. CHTR’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. NFLX has a short ratio of 3.58 compared to a short interest of 3.56 for CHTR. This implies that the market is currently less bearish on the outlook for CHTR.

Summary

Charter Communications, Inc. (NASDAQ:CHTR) beats Netflix, Inc. (NASDAQ:NFLX) on a total of 10 of the 13 factors compared between the two stocks. CHTR is growing fastly, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, CHTR is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, CHTR has better sentiment signals based on short interest.

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