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Hanesbrands Inc. (HBI) vs. CenturyLink, Inc. (CTL): Which is the Better Investment?

Hanesbrands Inc. (NYSE:HBI) shares are up more than 6.46% this year and recently increased 1.41% or $0.31 to settle at $22.26. CenturyLink, Inc. (NYSE:CTL), on the other hand, is up 12.53% year to date as of 07/31/2018. It currently trades at $18.77 and has returned 0.32% during the past week.

Hanesbrands Inc. (NYSE:HBI) and CenturyLink, Inc. (NYSE:CTL) are the two most active stocks in the Textile – Apparel Clothing 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 HBI to grow earnings at a 2.20% annual rate over the next 5 years. Comparatively, CTL is expected to grow at a -14.39% annual rate. All else equal, HBI’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. EBITDA margin of 33.6% for CenturyLink, Inc. (CTL). HBI’s ROI is 15.20% while CTL has a ROI of 2.90%. The interpretation is that HBI’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. HBI’s free cash flow (“FCF”) per share for the trailing twelve months was -0.56. Comparatively, CTL’s free cash flow per share was +0.26. On a percent-of-sales basis, HBI’s free cash flow was -3.12% 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

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HBI has a current ratio of 2.00 compared to 0.90 for CTL. This means that HBI can more easily cover its most immediate liabilities over the next twelve months. HBI’s debt-to-equity ratio is 6.41 versus a D/E of 1.59 for CTL. HBI is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HBI trades at a forward P/E of 11.63, a P/B of 11.42, and a P/S of 1.22, compared to a forward P/E of 18.08, a P/B of 0.85, and a P/S of 1.04 for CTL. HBI is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. 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. HBI is currently priced at a -0.93% to its one-year price target of 22.47. Comparatively, CTL is -6.99% relative to its price target of 20.18. This suggests that CTL is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. HBI has a beta of 0.53 and CTL’s beta is 0.79. HBI’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. HBI has a short ratio of 8.78 compared to a short interest of 9.40 for CTL. This implies that the market is currently less bearish on the outlook for HBI.

Summary

CenturyLink, Inc. (NYSE:CTL) beats Hanesbrands Inc. (NYSE:HBI) on a total of 7 of the 14 factors compared between the two stocks. CTL is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CTL is the cheaper of the two stocks on book value and sales basis, CTL is more undervalued relative to its price target. Finally, LLY has better sentiment signals based on short interest.

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