CenturyLink, Inc. (NYSE:CTL) shares are up more than 16.97% this year and recently decreased -0.61% or -$0.12 to settle at $19.51. Carnival Corporation (NYSE:CCL), on the other hand, is down -10.31% year to date as of 07/18/2018. It currently trades at $59.53 and has returned 2.66% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Carnival Corporation (NYSE:CCL) 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 increase earnings at a high compound rate over time are attractive to investors. Analysts expect CTL to grow earnings at a -14.39% annual rate over the next 5 years. Comparatively, CCL is expected to grow at a 13.30% annual rate. All else equal, CCL’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 27.37% for Carnival Corporation (CCL). CTL’s ROI is 2.90% while CCL has a ROI of 8.20%. The interpretation is that CCL’s business generates a higher return on investment than CTL’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, CCL’s free cash flow per share was +0.10. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while CCL converted 0.3% 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 0.20 for CCL. 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 0.41 for CCL. CTL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CTL trades at a forward P/E of 18.94, a P/B of 0.89, and a P/S of 1.08, compared to a forward P/E of 12.46, a P/B of 1.78, and a P/S of 2.30 for CCL. 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. CTL is currently priced at a -3.32% to its one-year price target of 20.18. Comparatively, CCL is -18.87% relative to its price target of 73.38. This suggests that CCL 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 0.84 and CCL’s beta is 0.84. CCL’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 9.77 compared to a short interest of 2.57 for CCL. This implies that the market is currently less bearish on the outlook for CCL.Summary
Carnival Corporation (NYSE:CCL) beats CenturyLink, Inc. (NYSE:CTL) on a total of 7 of the 14 factors compared between the two stocks. CCL is more profitable, generates a higher return on investment and has lower financial risk. CCL is more undervalued relative to its price target. Finally, CCL has better sentiment signals based on short interest.