Earnings

Dissecting the Numbers for Frontier Communications Corporation (FTR) and Big Lots, Inc. (BIG)

Frontier Communications Corporation (NASDAQ:FTR) shares are up more than 18.79% this year and recently decreased -2.31% or -$0.19 to settle at $8.03. Big Lots, Inc. (NYSE:BIG), on the other hand, is down -15.65% year to date as of 03/12/2018. It currently trades at $47.36 and has returned -14.40% during the past week.

Frontier Communications Corporation (NASDAQ:FTR) and Big Lots, Inc. (NYSE:BIG) are the two most active stocks in the market 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.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect FTR to grow earnings at a 7.30% annual rate over the next 5 years. Comparatively, BIG is expected to grow at a 16.25% annual rate. All else equal, BIG’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 7.91% for Big Lots, Inc. (BIG). FTR’s ROI is -5.50% while BIG has a ROI of 20.70%. The interpretation is that BIG’s business generates a higher return on investment than FTR’s.

Cash Flow 




Cash is king when it comes to investing. FTR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.35. Comparatively, BIG’s free cash flow per share was -2.90. On a percent-of-sales basis, FTR’s free cash flow was -0.3% while BIG converted -2.34% 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 measure a company’s ability to meet short-term obligations and longer-term debts. FTR has a current ratio of 0.50 compared to 1.70 for BIG. This means that BIG can more easily cover its most immediate liabilities over the next twelve months. FTR’s debt-to-equity ratio is 7.75 versus a D/E of 0.66 for BIG. FTR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

FTR trades at a P/B of 0.27, and a P/S of 0.07, compared to a forward P/E of 8.74, a P/B of 3.51, and a P/S of 0.43 for BIG. FTR is the cheaper 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. FTR is currently priced at a -19.3% to its one-year price target of 9.95. Comparatively, BIG is -22.53% relative to its price target of 61.13. This suggests that BIG 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 3.20 for FTR and 2.30 for BIG, 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. FTR has a beta of 0.78 and BIG’s beta is 0.99. FTR’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FTR has a short ratio of 0.07 compared to a short interest of 9.80 for BIG. This implies that the market is currently less bearish on the outlook for FTR.

Summary

Big Lots, Inc. (NYSE:BIG) beats Frontier Communications Corporation (NASDAQ:FTR) on a total of 7 of the 14 factors compared between the two stocks. BIG has higher cash flow per share, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, FTR is the cheaper of the two stocks on an earnings, book value and sales basis, BIG is more undervalued relative to its price target. Finally, MOS has better sentiment signals based on short interest.

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