Global

A Side-by-side Analysis of CenturyLink, Inc. (CTL) and American Eagle Outfitters, Inc. (AEO)

CenturyLink, Inc. (NYSE:CTL) shares are up more than 12.41% this year and recently decreased -0.16% or -$0.03 to settle at $18.75. American Eagle Outfitters, Inc. (NYSE:AEO), on the other hand, is up 25.32% year to date as of 06/26/2018. It currently trades at $23.56 and has returned 0.17% during the past week.

CenturyLink, Inc. (NYSE:CTL) and American Eagle Outfitters, Inc. (NYSE:AEO) 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. Comparatively, AEO is expected to grow at a 5.50% annual rate. All else equal, AEO’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 12.03% for American Eagle Outfitters, Inc. (AEO). CTL’s ROI is 2.90% while AEO has a ROI of 16.00%. The interpretation is that AEO’s business generates a higher return on investment than CTL’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, AEO’s free cash flow per share was -0.24. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while AEO converted -1.12% 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

Balance sheet risk is one of the biggest factors to consider before investing. CTL has a current ratio of 0.90 compared to 2.00 for AEO. This means that AEO 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 AEO. CTL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CTL trades at a forward P/E of 17.99, a P/B of 0.85, and a P/S of 1.04, compared to a forward P/E of 14.75, a P/B of 3.45, and a P/S of 1.09 for AEO. 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 -5.73% to its one-year price target of 19.89. Comparatively, AEO is -2.52% relative to its price target of 24.17. This suggests that CTL is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. CTL has a beta of 0.81 and AEO’s beta is 1.00. 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 9.37 compared to a short interest of 2.97 for AEO. This implies that the market is currently less bearish on the outlook for AEO.

Summary

American Eagle Outfitters, Inc. (NYSE:AEO) beats CenturyLink, Inc. (NYSE:CTL) on a total of 7 of the 14 factors compared between the two stocks. AEO is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. Finally, AEO has better sentiment signals based on short interest.

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