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Dissecting the Numbers for CenturyLink, Inc. (CTL) and Lowe’s Companies, Inc. (LOW)

CenturyLink, Inc. (NYSE:CTL) shares are up more than 15.41% this year and recently decreased -0.05% or -$0.01 to settle at $19.25. Lowe’s Companies, Inc. (NYSE:LOW), on the other hand, is down -8.04% year to date as of 05/17/2018. It currently trades at $85.47 and has returned 0.47% during the past week.

CenturyLink, Inc. (NYSE:CTL) and Lowe’s Companies, Inc. (NYSE:LOW) are the two most active stocks in the Telecom Services – Domestic industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

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 -12.58% annual rate over the next 5 years. Comparatively, LOW is expected to grow at a 17.84% annual rate. All else equal, LOW’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 10.24% for Lowe’s Companies, Inc. (LOW). CTL’s ROI is 2.90% while LOW has a ROI of 17.90%. The interpretation is that LOW’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 +0.26. Comparatively, LOW’s free cash flow per share was -1.19. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while LOW converted -1.44% 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 1.10 for LOW. This means that LOW can more easily cover its most immediate liabilities over the next twelve months. CTL’s debt-to-equity ratio is 1.59 versus a D/E of 2.89 for LOW. LOW is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CTL trades at a forward P/E of 18.04, a P/B of 0.88, and a P/S of 0.99, compared to a forward P/E of 13.93, a P/B of 12.04, and a P/S of 1.03 for LOW. 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 -2.48% to its one-year price target of 19.74. Comparatively, LOW is -18.89% relative to its price target of 105.38. This suggests that LOW is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CTL has a beta of 0.80 and LOW’s beta is 1.31. CTL’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CTL has a short ratio of 9.82 compared to a short interest of 1.68 for LOW. This implies that the market is currently less bearish on the outlook for LOW.

Summary

Lowe’s Companies, Inc. (NYSE:LOW) beats CenturyLink, Inc. (NYSE:CTL) on a total of 7 of the 14 factors compared between the two stocks. LOW is more profitable, generates a higher return on investment and higher liquidity. LOW is more undervalued relative to its price target. Finally, LOW has better sentiment signals based on short interest.

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