CenturyLink, Inc. (NYSE:CTL) shares are up more than 7.79% this year and recently increased 0.45% or $0.08 to settle at $17.98. HollyFrontier Corporation (NYSE:HFC), on the other hand, is down -13.92% year to date as of 02/22/2018. It currently trades at $44.09 and has returned -5.75% during the past week.
CenturyLink, Inc. (NYSE:CTL) and HollyFrontier Corporation (NYSE:HFC) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CTL to grow earnings at a -11.75% annual rate over the next 5 years.
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 2.78% for HollyFrontier Corporation (HFC). CTL’s ROI is 5.90% while HFC has a ROI of -1.90%. The interpretation is that CTL’s business generates a higher return on investment than HFC’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.16. Comparatively, HFC’s free cash flow per share was +1.12. On a percent-of-sales basis, CTL’s free cash flow was -0.97% while HFC converted 1.88% of its revenues into cash flow. This means that, for a given level of sales, HFC 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. CTL has a current ratio of 0.80 compared to 2.00 for HFC. This means that HFC 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 0.46 for HFC. CTL is therefore the more solvent of the two companies, and has lower financial risk.
CTL trades at a forward P/E of 12.85, a P/B of 0.75, and a P/S of 1.10, compared to a forward P/E of 11.78, a P/B of 1.60, and a P/S of 0.60 for HFC. CTL is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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 -8.55% to its one-year price target of 19.66. Comparatively, HFC is -12.52% relative to its price target of 50.40. This suggests that HFC 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 2.90 for HFC, which implies that analysts are more bullish on the outlook for HFC.
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. CTL has a beta of 0.70 and HFC’s beta is 1.09. CTL’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 4.23 compared to a short interest of 3.55 for HFC. This implies that the market is currently less bearish on the outlook for HFC.
HollyFrontier Corporation (NYSE:HFC) beats CenturyLink, Inc. (NYSE:CTL) on a total of 9 of the 14 factors compared between the two stocks. HFC is more profitable, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, HFC is the cheaper of the two stocks on an earnings and sales basis, HFC is more undervalued relative to its price target. Finally, HFC has better sentiment signals based on short interest.