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Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Carnival Corporation fares in the ModernGraham valuation model.

CCL Chart

CCL data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price$38.07
MG OpinionOvervalued
Value Based on 3% Growth$25.01
Value Based on 0% Growth$14.66
Market Implied Growth Rate6.79%
Net Current Asset Value (NCAV)-$17.75
PEmg22.07
Current Ratio0.25
PB Ratio1.21

Balance Sheet - 2/28/2014

Current Assets$1,645,000,000
Current Liabilities$6,688,000,000
Total Debt$7,992,000,000
Total Assets$39,905,000,000
Intangible Assets$4,522,000,000
Total Liabilities$15,435,000,000
Outstanding Shares777,000,000

Earnings Per Share

2014 (estimate)$1.60
2013$1.39
2012$1.67
2011$2.42
2010$2.46
2009$2.23
2008$2.86
2007$2.95
2006$2.77
2005$2.70
2004$2.24

Earnings Per Share - ModernGraham

2014 (estimate)$1.72
2013$1.87
2012$2.18
2011$2.49
2010$2.56
2009$2.65

Dividend History

CCL Dividend Chart

CCL Dividend data by YCharts

Conclusion:

Carnival Corporation is not suitable for either the Defensive Investor or the Enterprising Investor. The company holds a high level of debt, has not sufficiently grown earnings over the ten year or even the five year historical period, and it trades at a high PEmg ratio. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities through a review of 5 Undervalued Companies for the Defensive Investor and 5 Undervalued Companies for the Enterprising Investor.

From a valuation standpoint, the company has shown a drop in EPSmg (normalized earnings) from $2.56 in 2010 to an estimated $1.72 for 2014. This does not support the market's implied estimate of 6.79% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Carnival Corporation? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Carnival Corporation (NYSE:CCL) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of Carnival Corporation - 2014