Finance

Should You Buy American International Group, Inc. (AIG) or CenturyLink, Inc. (CTL)?

American International Group, Inc. (NYSE:AIG) shares are down more than -10.66% this year and recently increased 0.66% or $0.35 to settle at $53.23. CenturyLink, Inc. (NYSE:CTL), on the other hand, is up 12.11% year to date as of 06/28/2018. It currently trades at $18.70 and has returned 1.36% during the past week.

American International Group, Inc. (NYSE:AIG) and CenturyLink, Inc. (NYSE:CTL) are the two most active stocks in the Property & Casualty Insurance industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AIG to grow earnings at a 36.47% annual rate over the next 5 years. Comparatively, CTL is expected to grow at a -14.31% annual rate. All else equal, AIG’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 33.6% for CenturyLink, Inc. (CTL). AIG’s ROI is 1.90% while CTL has a ROI of 2.90%. The interpretation is that CTL’s business generates a higher return on investment than AIG’s.

Cash Flow



The value of a stock is simply the present value of its future free cash flows. AIG’s free cash flow (“FCF”) per share for the trailing twelve months was -1.33. Comparatively, CTL’s free cash flow per share was +0.26. On a percent-of-sales basis, AIG’s free cash flow was -2.41% while CTL converted 1.59% 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

AIG’s debt-to-equity ratio is 0.54 versus a D/E of 1.59 for CTL. CTL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AIG trades at a forward P/E of 9.46, a P/B of 0.77, and a P/S of 0.99, compared to a forward P/E of 17.95, a P/B of 0.85, and a P/S of 1.04 for CTL. AIG 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AIG is currently priced at a -15.33% to its one-year price target of 62.87. Comparatively, CTL is -5.98% relative to its price target of 19.89. This suggests that AIG 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. AIG has a beta of 1.23 and CTL’s beta is 0.81. CTL’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. AIG has a short ratio of 3.05 compared to a short interest of 9.61 for CTL. This implies that the market is currently less bearish on the outlook for AIG.

Summary




American International Group, Inc. (NYSE:AIG) beats CenturyLink, Inc. (NYSE:CTL) on a total of 8 of the 14 factors compared between the two stocks. AIG is growing fastly and has lower financial risk. In terms of valuation, AIG is the cheaper of the two stocks on an earnings, book value and sales basis, AIG is more undervalued relative to its price target. Finally, AIG has better sentiment signals based on short interest.

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