CenturyLink, Inc. (NYSE:CTL) shares are up more than 10.91% this year and recently increased 3.18% or $0.57 to settle at $18.50. STMicroelectronics N.V. (NYSE:STM), on the other hand, is up 0.69% year to date as of 04/25/2018. It currently trades at $21.99 and has returned -3.72% during the past week.
CenturyLink, Inc. (NYSE:CTL) and STMicroelectronics N.V. (NYSE:STM) are the two most active stocks in the Telecom Services – Domestic industry 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.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, STM is expected to grow at a 49.00% annual rate. All else equal, STM’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure 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 STM has a ROI of 11.30%. The interpretation is that STM’s business generates a higher return on investment than CTL’s.Cash Flow
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, STM’s free cash flow per share was +0.05. On a percent-of-sales basis, CTL’s free cash flow was -0.91% while STM converted 0.54% of its revenues into cash flow. This means that, for a given level of sales, STM 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 2.50 for STM. This means that STM 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 0.31 for STM. CTL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CTL trades at a forward P/E of 17.59, a P/B of 0.70, and a P/S of 1.13, compared to a forward P/E of 14.87, a P/B of 3.62, and a P/S of 2.55 for STM. 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 isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. CTL is currently priced at a -6.28% to its one-year price target of 19.74. Comparatively, STM is -19.92% relative to its price target of 27.46. This suggests that STM 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 0.79 and STM’s beta is 0.80. CTL’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CTL has a short ratio of 8.40 compared to a short interest of 1.62 for STM. This implies that the market is currently less bearish on the outlook for STM.Summary
STMicroelectronics N.V. (NYSE:STM) beats CenturyLink, Inc. (NYSE:CTL) on a total of 10 of the 14 factors compared between the two stocks. STM 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. STM is more undervalued relative to its price target. Finally, STM has better sentiment signals based on short interest.