Global

Critical Comparison: CenturyLink, Inc. (CTL) vs. Sempra Energy (SRE)

CenturyLink, Inc. (NYSE:CTL) shares are up more than 3.42% this year and recently decreased -1.26% or -$0.22 to settle at $17.25. Sempra Energy (NYSE:SRE), on the other hand, is up 3.13% year to date as of 04/12/2018. It currently trades at $110.27 and has returned -1.13% during the past week.

CenturyLink, Inc. (NYSE:CTL) and Sempra Energy (NYSE:SRE) are the two most active stocks in the Telecom Services – Domestic industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

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. Comparatively, SRE is expected to grow at a 9.60% annual rate. All else equal, SRE’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. 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 SRE has a ROI of 4.80%. The interpretation is that SRE’s business generates a higher return on investment than CTL’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.15. Comparatively, SRE’s free cash flow per share was -1.38. On a percent-of-sales basis, CTL’s free cash flow was -0.91% while SRE converted -3.14% of its revenues into cash flow. This means that, for a given level of sales, CTL 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 0.50 for SRE. This means that CTL can more easily cover its most immediate liabilities over the next twelve months. CTL’s debt-to-equity ratio is 1.61 versus a D/E of 1.53 for SRE. CTL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CTL trades at a forward P/E of 14.74, a P/B of 0.65, and a P/S of 1.05, compared to a forward P/E of 16.75, a P/B of 2.19, and a P/S of 2.61 for SRE. 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 -12.61% to its one-year price target of 19.74. Comparatively, SRE is -8.26% relative to its price target of 120.20. This suggests that CTL is the better investment over the next year.

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 0.78 and SRE’s beta is 0.50. SRE’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 6.10 compared to a short interest of 6.46 for SRE. This implies that the market is currently less bearish on the outlook for CTL.

Summary

CenturyLink, Inc. (NYSE:CTL) beats Sempra Energy (NYSE:SRE) on a total of 9 of the 14 factors compared between the two stocks. CTL is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, CTL is the cheaper of the two stocks on an earnings, book value and sales basis, CTL is more undervalued relative to its price target. Finally, CTL has better sentiment signals based on short interest.

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