Earnings

A Side-by-side Analysis of CenturyLink, Inc. (CTL) and NetApp, Inc. (NTAP)

CenturyLink, Inc. (NYSE:CTL) shares are down more than -3.30% this year and recently decreased -0.49% or -$0.08 to settle at $16.13. NetApp, Inc. (NASDAQ:NTAP), on the other hand, is up 10.61% year to date as of 03/27/2018. It currently trades at $61.19 and has returned -3.35% during the past week.

CenturyLink, Inc. (NYSE:CTL) and NetApp, Inc. (NASDAQ:NTAP) are the two most active stocks in the market based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CTL to grow earnings at a -12.12% annual rate over the next 5 years. Comparatively, NTAP is expected to grow at a 14.36% annual rate. All else equal, NTAP’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 22.85% for NetApp, Inc. (NTAP). CTL’s ROI is 2.90% while NTAP has a ROI of 10.70%. The interpretation is that NTAP’s business generates a higher return on investment than CTL’s.

Cash Flow 




Cash is king when it comes to investing. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.15. Comparatively, NTAP’s free cash flow per share was +1.25. On a percent-of-sales basis, CTL’s free cash flow was -0.91% while NTAP converted 6.07% of its revenues into cash flow. This means that, for a given level of sales, NTAP 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 1.90 for NTAP. This means that NTAP 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 1.00 for NTAP. CTL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CTL trades at a forward P/E of 13.55, a P/B of 0.61, and a P/S of 0.99, compared to a forward P/E of 16.25, a P/B of 7.54, and a P/S of 2.89 for NTAP. 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CTL is currently priced at a -18.04% to its one-year price target of 19.68. Comparatively, NTAP is -3.29% relative to its price target of 63.27. 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 2.40 for NTAP, 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 0.82 and NTAP’s beta is 1.25. 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 6.01 compared to a short interest of 2.91 for NTAP. This implies that the market is currently less bearish on the outlook for NTAP.

Summary

NetApp, Inc. (NASDAQ:NTAP) beats CenturyLink, Inc. (NYSE:CTL) on a total of 8 of the 14 factors compared between the two stocks. NTAP 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, NTAP has better sentiment signals based on short interest.

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