CenturyLink, Inc. (NYSE:CTL) shares are up more than 7.01% this year and recently increased 1.13% or $0.2 to settle at $17.85. Fortinet, Inc. (NASDAQ:FTNT), on the other hand, is up 44.77% year to date as of 06/11/2018. It currently trades at $63.25 and has returned 1.25% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Fortinet, Inc. (NASDAQ:FTNT) are the two most active stocks in the Telecom Services – Domestic industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.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 -14.31% annual rate over the next 5 years. Comparatively, FTNT is expected to grow at a 23.75% annual rate. All else equal, FTNT’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 13.38% for Fortinet, Inc. (FTNT). CTL’s ROI is 2.90% while FTNT has a ROI of 13.60%. The interpretation is that FTNT’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, FTNT’s free cash flow per share was +0.75. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while FTNT converted 8.44% of its revenues into cash flow. This means that, for a given level of sales, FTNT 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. CTL has a current ratio of 0.90 compared to 1.70 for FTNT. This means that FTNT 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 0.00 for FTNT. CTL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CTL trades at a forward P/E of 17.13, a P/B of 0.81, and a P/S of 0.99, compared to a forward P/E of 35.92, a P/B of 15.28, and a P/S of 6.92 for FTNT. CTL is the cheaper 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
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 -10.26% to its one-year price target of 19.89. Comparatively, FTNT is 7.48% relative to its price target of 58.85. This suggests that CTL 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 FTNT’s beta is 0.71. FTNT’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. CTL has a short ratio of 9.08 compared to a short interest of 3.29 for FTNT. This implies that the market is currently less bearish on the outlook for FTNT.Summary
Fortinet, Inc. (NASDAQ:FTNT) beats CenturyLink, Inc. (NYSE:CTL) on a total of 9 of the 14 factors compared between the two stocks. FTNT 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. In terms of valuation, CTL is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, FTNT has better sentiment signals based on short interest.