CenturyLink, Inc. (NYSE:CTL) shares are up more than 10.13% this year and recently decreased -0.11% or -$0.02 to settle at $18.37. Walmart Inc. (NYSE:WMT), on the other hand, is down -10.75% year to date as of 07/27/2018. It currently trades at $88.13 and has returned 0.08% during the past week.
CenturyLink, Inc. (NYSE:CTL) and Walmart Inc. (NYSE:WMT) 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
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CTL to grow earnings at a -14.39% annual rate over the next 5 years. Comparatively, WMT is expected to grow at a 5.59% annual rate. All else equal, WMT’s higher growth rate would imply a greater potential for capital appreciation.Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 5.56% for Walmart Inc. (WMT). CTL’s ROI is 2.90% while WMT has a ROI of 10.00%. The interpretation is that WMT’s business generates a higher return on investment than CTL’s.Cash Flow
Cash is king when it comes to investing. CTL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.26. Comparatively, WMT’s free cash flow per share was +0.61. On a percent-of-sales basis, CTL’s free cash flow was 1.59% while WMT converted 0.36% 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 WMT. 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 0.61 for WMT. CTL is therefore the more solvent of the two companies, and has lower financial risk.Valuation
CTL trades at a forward P/E of 17.70, a P/B of 0.84, and a P/S of 1.02, compared to a forward P/E of 17.73, a P/B of 3.44, and a P/S of 0.51 for WMT. 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 -8.97% to its one-year price target of 20.18. Comparatively, WMT is -6.68% relative to its price target of 94.44. This suggests that CTL 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 0.79 and WMT’s beta is 0.53. WMT’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. CTL has a short ratio of 9.34 compared to a short interest of 3.29 for WMT. This implies that the market is currently less bearish on the outlook for WMT.Summary
Walmart Inc. (NYSE:WMT) beats CenturyLink, Inc. (NYSE:CTL) on a total of 8 of the 14 factors compared between the two stocks. WMT is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. Finally, WMT has better sentiment signals based on short interest.