CenturyLink, Inc. (NYSE:CTL) shares are up more than 15.59% this year and recently decreased -0.05% or -$0.01 to settle at $19.28. PulteGroup, Inc. (NYSE:PHM), on the other hand, is down -10.08% year to date as of 05/21/2018. It currently trades at $29.90 and has returned -3.42% during the past week.
CenturyLink, Inc. (NYSE:CTL) and PulteGroup, Inc. (NYSE:PHM) 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 -13.71% annual rate over the next 5 years. Comparatively, PHM is expected to grow at a 43.26% annual rate. All else equal, PHM’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 12.04% for PulteGroup, Inc. (PHM). CTL’s ROI is 2.90% while PHM has a ROI of 8.20%. The interpretation is that PHM’s business generates a higher return on investment than CTL’s.Cash Flow
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, PHM’s free cash flow per share was +0.44. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while PHM converted 1.47% 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
CTL’s debt-to-equity ratio is 1.59 versus a D/E of 0.78 for PHM. CTL is therefore the more solvent of the two companies, and has lower financial risk.
CTL trades at a forward P/E of 17.67, a P/B of 0.88, and a P/S of 1.07, compared to a forward P/E of 8.04, a P/B of 2.01, and a P/S of 0.95 for PHM. CTL is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CTL is currently priced at a -2.33% to its one-year price target of 19.74. Comparatively, PHM is -16.53% relative to its price target of 35.82. This suggests that PHM is the better investment over the next year.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. CTL has a beta of 0.80 and PHM’s beta is 1.01. 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 9.79 compared to a short interest of 4.18 for PHM. This implies that the market is currently less bearish on the outlook for PHM.Summary
PulteGroup, Inc. (NYSE:PHM) beats CenturyLink, Inc. (NYSE:CTL) on a total of 9 of the 14 factors compared between the two stocks. PHM is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. In terms of valuation, PHM is the cheaper of the two stocks on an earnings and sales basis, PHM is more undervalued relative to its price target. Finally, PHM has better sentiment signals based on short interest.