CenturyLink, Inc. (NYSE:CTL) shares are down more than -1.50% this year and recently increased 1.36% or $0.22 to settle at $16.43. Transocean Ltd. (NYSE:RIG), on the other hand, is down -7.30% year to date as of 03/30/2018. It currently trades at $9.90 and has returned -1.30% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Transocean Ltd. (NYSE:RIG) 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.Growth
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 -12.12% annual rate over the next 5 years.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. CenturyLink, Inc. (CTL) has an EBITDA margin of 33.8%. This suggests that CTL underlying business is more profitable CTL’s ROI is 2.90% while RIG has a ROI of -12.60%. The interpretation is that CTL’s business generates a higher return on investment than RIG’s.Cash Flow
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 -0.15. Comparatively, RIG’s free cash flow per share was +0.37. On a percent-of-sales basis, CTL’s free cash flow was -0.91% while RIG converted 5.71% of its revenues into cash flow. This means that, for a given level of sales, RIG 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 0.90 compared to 3.40 for RIG. This means that RIG 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 0.58 for RIG. CTL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CTL trades at a forward P/E of 14.04, a P/B of 0.62, and a P/S of 0.98, compared to a P/B of 0.30, and a P/S of 1.51 for RIG. CTL is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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
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 -16.77% to its one-year price target of 19.74. Comparatively, RIG is -19.32% relative to its price target of 12.27. This suggests that RIG is the better investment over the next year.
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 0.80 and RIG’s beta is 1.42. CTL’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. CTL has a short ratio of 6.02 compared to a short interest of 5.90 for RIG. This implies that the market is currently less bearish on the outlook for RIG.Summary
Transocean Ltd. (NYSE:RIG) beats CenturyLink, Inc. (NYSE:CTL) on a total of 9 of the 14 factors compared between the two stocks. RIG 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, RIG is the cheaper of the two stocks on an earnings and book value, RIG is more undervalued relative to its price target. Finally, RIG has better sentiment signals based on short interest.