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Dissecting the Numbers for CenturyLink, Inc. (CTL) and Urban Outfitters, Inc. (URBN)

CenturyLink, Inc. (NYSE:CTL) shares are up more than 13.31% this year and recently increased 2.05% or $0.38 to settle at $18.90. Urban Outfitters, Inc. (NASDAQ:URBN), on the other hand, is up 16.37% year to date as of 04/27/2018. It currently trades at $40.80 and has returned 6.39% during the past week.

CenturyLink, Inc. (NYSE:CTL) and Urban Outfitters, Inc. (NASDAQ:URBN) are the two most active stocks in the Telecom Services – Domestic industry 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

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CTL to grow earnings at a -12.12% annual rate over the next 5 years. Comparatively, URBN is expected to grow at a 15.50% annual rate. All else equal, URBN’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 10.78% for Urban Outfitters, Inc. (URBN). CTL’s ROI is 2.90% while URBN has a ROI of 13.20%. The interpretation is that URBN’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, URBN’s free cash flow per share was +1.03. On a percent-of-sales basis, CTL’s free cash flow was -0.91% while URBN converted 3.09% of its revenues into cash flow. This means that, for a given level of sales, URBN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. CTL has a current ratio of 0.90 compared to 2.70 for URBN. This means that URBN 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 0.00 for URBN. CTL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CTL trades at a forward P/E of 17.97, a P/B of 0.71, and a P/S of 1.13, compared to a forward P/E of 16.78, a P/B of 3.39, and a P/S of 1.19 for URBN. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CTL is currently priced at a -4.26% to its one-year price target of 19.74. Comparatively, URBN is 4.56% relative to its price target of 39.02. This suggests that CTL is the better investment over the next year.

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 0.78 and URBN’s beta is 0.52. URBN’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 9.54 compared to a short interest of 3.14 for URBN. This implies that the market is currently less bearish on the outlook for URBN.

Summary

Urban Outfitters, Inc. (NASDAQ:URBN) beats CenturyLink, Inc. (NYSE:CTL) on a total of 10 of the 14 factors compared between the two stocks. URBN 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. Finally, URBN has better sentiment signals based on short interest.

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