A Side-by-side Analysis of Liberty Global Plc (LBTYA) and Viavi Solutions Inc. (VIAV)

Liberty Global Plc (NASDAQ:LBTYA) shares are up more than 16.42% this year and recently decreased -0.74% or -$0.19 to settle at $24.84. Viavi Solutions Inc. (NASDAQ:VIAV), on the other hand, is up 57.51% year to date as of 11/07/2019. It currently trades at $15.83 and has returned -0.81% during the past week.

Liberty Global Plc (NASDAQ:LBTYA) and Viavi Solutions Inc. (NASDAQ:VIAV) are the two most active stocks in the CATV Systems industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

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. Comparatively, VIAV is expected to grow at a 15.00% annual rate. All else equal, VIAV’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., compared to an EBITDA margin of 17.75% for Viavi Solutions Inc. (VIAV). LBTYA’s ROI is 1.00% while VIAV has a ROI of 2.70%. The interpretation is that VIAV’s business generates a higher return on investment than LBTYA’s.

Cash Flow

If there’s one thing investors care more about than earnings, it’s cash flow. LBTYA’s free cash flow (“FCF”) per share for the trailing twelve months was +1.89. Comparatively, VIAV’s free cash flow per share was +0.08. On a percent-of-sales basis, LBTYA’s free cash flow was 11.55% while VIAV converted 1.63% of its revenues into cash flow. This means that, for a given level of sales, LBTYA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. LBTYA has a current ratio of 0.40 compared to 3.20 for VIAV. This means that VIAV can more easily cover its most immediate liabilities over the next twelve months. LBTYA’s debt-to-equity ratio is 7.24 versus a D/E of 0.83 for VIAV. LBTYA is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LBTYA trades at a P/B of 4.42, and a P/S of 1.50, compared to a forward P/E of 20.48, a P/B of 4.99, and a P/S of 3.11 for VIAV. LBTYA 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

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. LBTYA is currently priced at a -16.67% to its one-year price target of 29.81. Comparatively, VIAV is -6.88% relative to its price target of 17.00. This suggests that LBTYA 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. LBTYA has a beta of 1.46 and VIAV’s beta is 1.12. VIAV’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. LBTYA has a short ratio of 3.49 compared to a short interest of 5.09 for VIAV. This implies that the market is currently less bearish on the outlook for LBTYA.

Summary

Liberty Global Plc (NASDAQ:LBTYA) beats Viavi Solutions Inc. (NASDAQ:VIAV) on a total of 8 of the 14 factors compared between the two stocks. LBTYA is more profitable, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, LBTYA is the cheaper of the two stocks on an earnings, book value and sales basis, LBTYA is more undervalued relative to its price target. Finally, LBTYA has better sentiment signals based on short interest.