Carnival: Latest Sell-Off Might Create A Long-Term Opportunity

| About: Carnival Corporation (CCL)

Shares of Carnival Corporation (NYSE:CCL) continue their sell-off after the cruise operator reported its third quarter results. The company was cautious for the remainder of the year and the start of 2014.

Investors were disappointed by soft booking and higher current costs related to vessel upgrades and advertising campaigns.

While short-term earnings will remain soft into 2014, shares do offer some long-term appeal if the company can re-ignite growth driven by its Asian operations. If no serious incidents will occur in 2014, earnings should be able to increase again after the company's vessels have been involved in numerous incidents, including the Costa Concordia disaster.

Even though the Costa Concordia is a subsidiary of the business, the accident resulted in bad publicity for the entire company.

Third Quarter Results

Carnival generated third quarter revenues of $4.73 billion, up 0.9% on the year before, thereby comfortably beating consensus estimates of $4.65 billion.

Net income fell from $1.33 billion last year to $934 million, partially on the back of $203 million in impairment charges on two smaller Costa ships and the Ibero trademark.

GAAP net earnings fell from $1.71 per share to just $1.20 over the past quarter. Non-GAAP earnings fell from $1.53 to $1.38 per share, still beating consensus estimates of $1.30 per share.

Looking Into The Results

While revenue growth increased by a modest 0.9%, Carnival reported a 3.8% fall in net revenue yields.

Costs were increasing as costs per available berth day rose by 4.6% on the back of higher pension costs and costs related to vessel initiatives. A 2.3% increase in fuel prices was offset by a 5.2% decline in fuel consumption as initial efficiency investments are already paying off.

And Looking Ahead

Cumulative bookings for the second half of 2013 and the first half year of 2014 are behind last year's levels.

The Italian disaster at its European subsidiary and some mechanical issues with domestic ships have hurt Carnival's public image quite a bit. To offset this and rebuild the strength of the brand, the company launched a national TV marketing campaign.

Net revenue yields for the remainder of 2013 are expected to fall by 3% resulting in full year non-GAAP earnings of $1.51 to $1.57 per share. Worse, Carnival sees weakness in net revenue yields for the first half of 2014, while it sees costs rising for that year. Previously, Carnival guided for full year earnings of $1.45 to $1.65 per share, while consensus estimates stood at $1.55 per share.

Fourth quarter non-GAAP earnings are seen around the break-even point, plus or minus three cents per share. This compares to last year's non-GAAP earnings of $0.14 per share and consensus estimates of $0.09 per share.


Carnival ended its second quarter with $981 million in cash and equivalents. To finance all those big ships, Carnival has some $10.0 billion in total debt outstanding, resulting in a net debt position of around $9.0 billion.

For the first nine months of the year, Carnival generated revenues of $11.80 billion, unchanged from last year. Net income fell from $1.21 billion to $1.01 billion in the meantime, with diluted GAAP earnings per share came in at $1.30 per share.

At this pace annual revenues are seen around $15.3 billion, while GAAP earnings could come in around $1.25 per share.

Trading around $33 per share, Carnival is valued around $25 billion. This values equity in the firm at 1.6 times annual revenues at roughly 25 times annual earnings.

Carnival pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 3.1%.

Some Historical Perspective

Long term holders in Carnival have seen poor returns. Shares peaked in their mid-fifties in 2004 to fall to lows of $20 in 2009. Ever since, shares have traded in a $30-$50 trading range, currently exchanging hands at $33 per share after shares have fallen some 10% so far this year.

Between the calendar year of 2009 and 2012, Carnival has increased its annual revenues by a cumulative 14% to $15.4 billion. Net earnings fell from $1.8 billion to $1.2 billion in the meantime, and are expected to fall further this year on higher write-downs and lower bookings.

Investment Thesis

So Carnival is facing some headwinds. The 2012 disaster with the Costa Concordia, which killed 32 souls, is still putting pressure on the brand. This tragedy and more recent incidents with the Costa's Triumph, which stranded passengers for days in a row, has urged the company to take action. Besides these incidents, other vessels have also suffered from various other mechanical issues.

CEO Donald remains upbeat as he sees tremendous opportunities to create shareholder value going forward. Yet 2013 remains challenging as the company continues to suffer from the aftermath of the Costa Concordia disaster. Carnival furthermore has to incur higher costs including vessel upgrade initiatives and large marketing campaigns to boost traffic. The company aims to spend $180 million to reduce ship emissions and save on fuel, while investing some $700 million to improve fire protection and back-up settings.

Greater traffic going forward with stabilizing revenue yields later into 2014 should bode well for the future, especially in combination with lower advertising and vessel upgrade expenses. Add to this the growth opportunity with 5 new Princess Cruises vessels being introduced in Asia, and growth in the region and overall should pick up again.

The key thing for Carnival is to boost the appeal of cruises around the world as this form of travel is often associated with senior citizens or honeymoons. The important word of mouth advertising should grow the market segment going forward into the future, as the total vessel fleet exceeds 100 ships by now.

At the time of the Costa Concordia disaster, back in January of 2012, I last took a look at Carnival's prospects. I concluded that post-disaster, shares were worth it to be picked up, trading around $30 per share. I acknowledged that direct costs from the disaster would be low, but that the damaged image would have more lasting effects, estimated to impact the Costa brand for another three years according to the company itself.

While shares have risen to highs of almost $40 later that year, they are now trading at $33 per share. At these levels the valuation still looks fair, given that earnings could return toward $2.50 per share again in 2015 or so.

Combined with a current 3.1% dividend yield, shares might be worth holding onto, or being added to your portfolio. If the company can rejuvenate earnings growth in the second half of 2014, or provide a strong future outlook at the time, shares could top $40 per share again by the first half of next year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.