CenturyLink, Inc. (NYSE:CTL) shares are down more than -41.80% this year and recently decreased -3.49% or -$0.5 to settle at $13.84. Frontier Communications Corporation (NASDAQ:FTR), on the other hand, is down -85.31% year to date as of 11/24/2017. It currently trades at $7.45 and has returned 11.86% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Frontier Communications Corporation (NASDAQ:FTR) are the two most active stocks in the Telecom Services – Domestic industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Comparatively, FTR is expected to grow at a 7.30% annual rate. All else equal, FTR’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 34.75% for Frontier Communications Corporation (FTR). CTL’s ROI is 5.90% while FTR has a ROI of 5.10%. The interpretation is that CTL’s business generates a higher return on investment than FTR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, FTR’s free cash flow per share was -0.35. On a percent-of-sales basis, CTL’s free cash flow was -0.98% while FTR converted -0.31% of its revenues into cash flow. This means that, for a given level of sales, FTR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CTL has a current ratio of 0.80 compared to 0.70 for FTR. This means that CTL can more easily cover its most immediate liabilities over the next twelve months. CTL’s debt-to-equity ratio is 1.93 versus a D/E of 5.21 for FTR. FTR is therefore the more solvent of the two companies, and has lower financial risk.
CTL trades at a forward P/E of 11.67, a P/B of 0.58, and a P/S of 0.92, compared to a P/B of 0.17, and a P/S of 0.07 for FTR. CTL 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 is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CTL is currently priced at a -29.71% to its one-year price target of 19.69. Comparatively, FTR is -46.13% relative to its price target of 13.83. This suggests that FTR is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for CTL and 3.00 for FTR, which implies that analysts are more bullish on the outlook for FTR.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CTL has a beta of 0.89 and FTR’s beta is 0.66. FTR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.CTL has a short ratio of 10.53 compared to a short interest of 7.71 for FTR. This implies that the market is currently less bearish on the outlook for FTR.
Frontier Communications Corporation (NASDAQ:FTR) beats CenturyLink, Inc. (NYSE:CTL) on a total of 8 of the 14 factors compared between the two stocks. FTR is more profitable and has a higher cash conversion rate. In terms of valuation, FTR is the cheaper of the two stocks on an earnings, book value and sales basis, FTR is more undervalued relative to its price target. Finally, FTR has better sentiment signals based on short interest.