AT&T Inc. (NYSE:T) shares are down more than -19.57% this year and recently decreased -1.39% or -$0.44 to settle at $31.27. LendingClub Corporation (NYSE:LC), on the other hand, is up 5.08% year to date as of 07/19/2018. It currently trades at $4.34 and has returned -2.69% during the past week.
AT&T Inc. (NYSE:T) and LendingClub Corporation (NYSE:LC) 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 T to grow earnings at a 4.94% annual rate over the next 5 years. Comparatively, LC is expected to grow at a -8.60% annual rate. All else equal, T’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. AT&T Inc. (T) has an EBITDA margin of 29.48%. This suggests that T underlying business is more profitable T’s ROI is 5.00% while LC has a ROI of -4.90%. The interpretation is that T’s business generates a higher return on investment than LC’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. T’s free cash flow (“FCF”) per share for the trailing twelve months was -0.04. Comparatively, LC’s free cash flow per share was +0.00. On a percent-of-sales basis, T’s free cash flow was -0.15% while LC converted 0% of its revenues into cash flow. This means that, for a given level of sales, LC is able to generate more free cash flow for investors.Liquidity and Financial Risk
T’s debt-to-equity ratio is 1.12 versus a D/E of 3.30 for LC. LC is therefore the more solvent of the two companies, and has lower financial risk.
T trades at a forward P/E of 8.90, a P/B of 1.32, and a P/S of 1.45, compared to a forward P/E of 22.96, a P/B of 1.99, and a P/S of 1.62 for LC. T 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. T is currently priced at a -15.53% to its one-year price target of 37.02. Comparatively, LC is -12.85% relative to its price target of 4.98. This suggests that T 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. T has a beta of 0.42 and LC’s beta is 1.44. T’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. T has a short ratio of 2.36 compared to a short interest of 7.07 for LC. This implies that the market is currently less bearish on the outlook for T.Summary
AT&T Inc. (NYSE:T) beats LendingClub Corporation (NYSE:LC) on a total of 11 of the 14 factors compared between the two stocks. T is growing fastly, is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, T is the cheaper of the two stocks on an earnings, book value and sales basis, T is more undervalued relative to its price target. Finally, T has better sentiment signals based on short interest.