CenturyLink, Inc. (NYSE:CTL) shares are up more than 5.16% this year and recently decreased -2.28% or -$0.41 to settle at $17.54. Pareteum Corporation (NYSE:TEUM), on the other hand, is up 23.67% year to date as of 06/13/2018. It currently trades at $2.56 and has returned 9.87% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Pareteum Corporation (NYSE:TEUM) 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
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 CTL to grow earnings at a -14.31% annual rate over the next 5 years.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. CenturyLink, Inc. (CTL) has an EBITDA margin of 33.6%. This suggests that CTL underlying business is more profitable CTL’s ROI is 2.90% while TEUM has a ROI of -54.20%. The interpretation is that CTL’s business generates a higher return on investment than TEUM’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, TEUM’s free cash flow per share was -0.01. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while TEUM converted -0% 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 2.50 for TEUM. This means that TEUM 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 0.04 for TEUM. CTL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CTL trades at a forward P/E of 16.83, a P/B of 0.80, and a P/S of 0.97, compared to a forward P/E of 34.13, a P/B of 7.53, and a P/S of 8.86 for TEUM. 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
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 -11.81% to its one-year price target of 19.89. Comparatively, TEUM is -30.81% relative to its price target of 3.70. This suggests that TEUM 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 TEUM’s beta is 0.26. TEUM’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. CTL has a short ratio of 9.04 compared to a short interest of 3.40 for TEUM. This implies that the market is currently less bearish on the outlook for TEUM.Summary
Pareteum Corporation (NYSE:TEUM) beats CenturyLink, Inc. (NYSE:CTL) on a total of 7 of the 14 factors compared between the two stocks. TEUM is more profitable, 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, TEUM is more undervalued relative to its price target. Finally, TEUM has better sentiment signals based on short interest.