Cisco Systems, Inc. (NASDAQ:CSCO) shares are up more than 9.90% this year and recently increased 2.09% or $0.86 to settle at $42.09. CenturyLink, Inc. (NYSE:CTL), on the other hand, is up 5.40% year to date as of 02/14/2018. It currently trades at $17.58 and has returned 3.05% during the past week.
Cisco Systems, Inc. (NASDAQ:CSCO) and CenturyLink, Inc. (NYSE:CTL) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect CSCO to grow earnings at a 8.98% annual rate over the next 5 years. Comparatively, CTL is expected to grow at a -11.75% annual rate. All else equal, CSCO’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 39.56% for CenturyLink, Inc. (CTL). CSCO’s ROI is 9.30% while CTL has a ROI of 5.90%. The interpretation is that CSCO’s business generates a higher return on investment than CTL’s.
Cash is king when it comes to investing. CSCO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.30. Comparatively, CTL’s free cash flow per share was -0.16. On a percent-of-sales basis, CSCO’s free cash flow was 3.09% while CTL converted -0.98% of its revenues into cash flow. This means that, for a given level of sales, CSCO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. CSCO has a current ratio of 2.90 compared to 0.80 for CTL. This means that CSCO can more easily cover its most immediate liabilities over the next twelve months. CSCO’s debt-to-equity ratio is 0.55 versus a D/E of 1.93 for CTL. CTL is therefore the more solvent of the two companies, and has lower financial risk.
CSCO trades at a forward P/E of 16.05, a P/B of 3.18, and a P/S of 4.37, compared to a forward P/E of 14.22, a P/B of 0.73, and a P/S of 1.15 for CTL. CSCO 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. CSCO is currently priced at a 0.94% to its one-year price target of 41.70. Comparatively, CTL is -9.15% relative to its price target of 19.35. This suggests that CTL 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 2.10 for CSCO and 2.60 for CTL, which implies that analysts are more bullish on the outlook for CTL.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CSCO has a beta of 1.16 and CTL’s beta is 0.82. CTL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CSCO has a short ratio of 2.37 compared to a short interest of 4.26 for CTL. This implies that the market is currently less bearish on the outlook for CSCO.
Cisco Systems, Inc. (NASDAQ:CSCO) beats CenturyLink, Inc. (NYSE:CTL) on a total of 8 of the 14 factors compared between the two stocks. CSCO is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, CSCO has better sentiment signals based on short interest.