Twenty-First Century Fox, Inc. (NASDAQ:FOXA) shares are up more than 9.38% this year and recently decreased -1.02% or -$0.39 to settle at $37.77. Southwest Airlines Co. (NYSE:LUV), on the other hand, is down -19.83% year to date as of 05/17/2018. It currently trades at $52.47 and has returned 1.02% during the past week.

Twenty-First Century Fox, Inc. (NASDAQ:FOXA) and Southwest Airlines Co. (NYSE:LUV) are the two most active stocks in the Entertainment – Diversified 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**

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 FOXA to grow earnings at a 10.13% annual rate over the next 5 years. Comparatively, LUV is expected to grow at a 18.66% annual rate. All else equal, LUV’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., compared to an EBITDA margin of 20.94% for Southwest Airlines Co. (LUV). FOXA’s ROI is 9.20% while LUV has a ROI of 17.50%. The interpretation is that LUV’s business generates a higher return on investment than FOXA’s.

**Cash Flow**

The value of a stock is simply the present value of its future free cash flows. FOXA’s free cash flow (“FCF”) per share for the trailing twelve months was +0.82. Comparatively, LUV’s free cash flow per share was +0.72. On a percent-of-sales basis, FOXA’s free cash flow was 5.33% while LUV converted 1.97% of its revenues into cash flow. This means that, for a given level of sales, FOXA is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Balance sheet risk is one of the biggest factors to consider before investing. FOXA has a current ratio of 2.20 compared to 0.70 for LUV. This means that FOXA can more easily cover its most immediate liabilities over the next twelve months. FOXA’s debt-to-equity ratio is 1.08 versus a D/E of 0.38 for LUV. FOXA is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

FOXA trades at a forward P/E of 16.79, a P/B of 3.81, and a P/S of 2.36, compared to a forward P/E of 10.00, a P/B of 3.20, and a P/S of 1.45 for LUV. FOXA is the expensive 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 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. FOXA is currently priced at a -6.6% to its one-year price target of 40.44. Comparatively, LUV is -23.08% relative to its price target of 68.21. This suggests that LUV 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. FOXA has a beta of 1.33 and LUV’s beta is 1.14. LUV’s shares are therefore the less volatile of the two stocks.

**Insider Activity and Investor Sentiment**

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. FOXA has a short ratio of 1.78 compared to a short interest of 2.18 for LUV. This implies that the market is currently less bearish on the outlook for FOXA.

**Summary**

Southwest Airlines Co. (NYSE:LUV) beats Twenty-First Century Fox, Inc. (NASDAQ:FOXA) on a total of 10 of the 14 factors compared between the two stocks. LUV has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, LUV is the cheaper of the two stocks on an earnings, book value and sales basis, LUV is more undervalued relative to its price target. Finally, MSFT has better sentiment signals based on short interest.