Global

Critical Comparison: CenturyLink, Inc. (CTL) vs. The Southern Company (SO)

CenturyLink, Inc. (NYSE:CTL) shares are up more than 10.61% this year and recently decreased -0.65% or -$0.12 to settle at $18.45. The Southern Company (NYSE:SO), on the other hand, is down -5.82% year to date as of 06/21/2018. It currently trades at $45.29 and has returned 2.44% during the past week.

CenturyLink, Inc. (NYSE:CTL) and The Southern Company (NYSE:SO) 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

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect CTL to grow earnings at a -14.31% annual rate over the next 5 years. Comparatively, SO is expected to grow at a 2.72% annual rate. All else equal, SO’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 23.12% for The Southern Company (SO). CTL’s ROI is 2.90% while SO has a ROI of 2.90%. The interpretation is that CTL’s business generates a higher return on investment than SO’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, SO’s free cash flow per share was -0.92. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while SO converted -4.04% 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 measure a company’s ability to meet short-term obligations and longer-term debts. CTL has a current ratio of 0.90 compared to 0.70 for SO. This means that CTL 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 2.11 for SO. SO is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CTL trades at a forward P/E of 17.71, a P/B of 0.84, and a P/S of 1.02, compared to a forward P/E of 15.01, a P/B of 1.86, and a P/S of 1.94 for SO. 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. CTL is currently priced at a -7.24% to its one-year price target of 19.89. Comparatively, SO is -1.97% relative to its price target of 46.20. This suggests that CTL is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. CTL has a beta of 0.80 and SO’s beta is 0.05. SO’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 9.22 compared to a short interest of 6.34 for SO. This implies that the market is currently less bearish on the outlook for SO.

Summary

CenturyLink, Inc. (NYSE:CTL) beats The Southern Company (NYSE:SO) on a total of 10 of the 14 factors compared between the two stocks. CTL 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 book value and sales basis, CTL is more undervalued relative to its price target. Finally, CF has better sentiment signals based on short interest.

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