CenturyLink, Inc. (NYSE:CTL) shares are up more than 3.78% this year and recently decreased -0.17% or -$0.03 to settle at $17.31. Frontier Communications Corporation (NASDAQ:FTR), on the other hand, is up 14.94% year to date as of 01/19/2018. It currently trades at $7.77 and has returned 0.65% 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. 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CTL to grow earnings at a -15.00% annual rate over the next 5 years. 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
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. 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 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.
Cash is king when it comes to investing. 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
Balance sheet risk is one of the biggest factors to consider before investing. 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 13.73, a P/B of 0.72, and a P/S of 1.12, compared to a P/B of 0.18, and a P/S of 0.06 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 -9.37% to its one-year price target of 19.10. Comparatively, FTR is -37.49% relative to its price target of 12.43. 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 2.60 for CTL and 3.10 for FTR, which implies that analysts are more bullish on the outlook for FTR.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CTL has a beta of 0.79 and FTR’s beta is 0.52. FTR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CTL has a short ratio of 3.69 compared to a short interest of 0.06 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.