CenturyLink, Inc. (NYSE:CTL) shares are down more than -1.98% this year and recently increased 0.62% or $0.1 to settle at $16.35. Microchip Technology Incorporated (NASDAQ:MCHP), on the other hand, is up 12.89% year to date as of 03/21/2018. It currently trades at $99.21 and has returned 2.02% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Microchip Technology Incorporated (NASDAQ:MCHP) are the two most active stocks in the market based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CTL to grow earnings at a -12.70% annual rate over the next 5 years. Comparatively, MCHP is expected to grow at a 17.06% annual rate. All else equal, MCHP’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 38.73% for Microchip Technology Incorporated (MCHP). CTL’s ROI is 2.90% while MCHP has a ROI of 5.00%. The interpretation is that MCHP’s business generates a higher return on investment than CTL’s.
The value of a stock is simply the present value of its future free cash flows. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.15. Comparatively, MCHP’s free cash flow per share was +0.91. On a percent-of-sales basis, CTL’s free cash flow was -0.91% while MCHP converted 6.26% of its revenues into cash flow. This means that, for a given level of sales, MCHP is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. CTL has a current ratio of 0.90 compared to 3.00 for MCHP. This means that MCHP can more easily cover its most immediate liabilities over the next twelve months. CTL’s debt-to-equity ratio is 1.61 versus a D/E of 0.95 for MCHP. CTL is therefore the more solvent of the two companies, and has lower financial risk.
CTL trades at a forward P/E of 13.59, a P/B of 0.62, and a P/S of 0.98, compared to a forward P/E of 16.98, a P/B of 7.29, and a P/S of 5.95 for MCHP. CTL 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
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 -16.92% to its one-year price target of 19.68. Comparatively, MCHP is -11.07% relative to its price target of 111.56. 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 2.60 for CTL and 1.70 for MCHP, which implies that analysts are more bullish on the outlook for CTL.
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 0.77 and MCHP’s beta is 1.08. CTL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. CTL has a short ratio of 6.09 compared to a short interest of 9.53 for MCHP. This implies that the market is currently less bearish on the outlook for CTL.
Microchip Technology Incorporated (NASDAQ:MCHP) beats CenturyLink, Inc. (NYSE:CTL) on a total of 8 of the 14 factors compared between the two stocks. MCHP , is more profitable, 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. In terms of valuation, CTL is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, MOS has better sentiment signals based on short interest.