After the tragic sinking of the Costa Concordia ship, investors are naturally wary about Carnival Cruise Line (CCL). The company has been downgraded from a "strong buy" to just a "buy" and all 14 of the revisions to EPS came down for a net change of -10.4%. I find that the financial impact of the disaster will be felt more in terms of lost future business due to the brand being weakened than in terms of litigation and ship costs. Based on my multiples analysis and DCF model, I further find it to be discounted reasonably below intrinsic value but still not a screaming "buy". The same goes for Royal Caribbean (RCL). Marriott (MAR), on the other hand, is the safest due to it operating in more of a stable industry.
From a multiples perspective, Royal Caribbean is the cheapest of the two. It trades at a respective 10x and 8.9x past and forward earnings while Carnival trades at a respective 13.2x and 10.3x past earnings. With that said, the latter comes with less volatility and a dividend yield that is 170 bps higher at 3.1%. Furthermore, Carnival has greater room to grow margins despite ticket pricing holding up better by its competitor.
At the recent third quarter earnings call, Carnival's CFO, David Bernstein, noted decent performance:
Our earnings per share for the fourth quarter was $0.28. The fourth quarter came in right at the midpoint of our September guidance.
Now let's take a look at the fourth quarter operating results versus the prior year. Our capacity increased 6%, with 2/3 of the increase coming from our Europe, Australia and Asian brands, or as we call them, our EAA brands. Our EAA brands grew 10%, while our North American brands grew 3%.
Our net ticket -- our net revenue yields increased 1.4% in the fourth quarter, with similar increases in both net ticket and net onboard and other revenue yields. With respect to net ticket revenue yields, our North American brands were up almost 8% despite the negative impact from MENA on European itineraries. The improvement was driven by higher yields in the Caribbean, Alaska, Canada, New England and transatlantic itineraries.
While the third quarter results were in line with consensus, the 2012 guidance was disappointing. Management guided for 2012 EPS between $2.55 and $2.85, but also noted that it anticipates ticket pricing to improve. It is estimated that the Costa Concordia sinking will dilute EPS by $0.11 to $0.12 - less than what the market acknowledges. The loss of the ship itself has nominal financial impact, since it has been insured. And, furthermore, litigation might not be so damaging when you consider the Louis Cruise Lines sinking. Going forward, the company plans to receive 2 to 3 ships per year, which is a drop off from the historical average of 5 over the last 10 years. Analysts are anticipating capital allocation will be aggressive at $5B over the next five years.
Consensus estimates for Carnival's EPS forecast that it will grow by 0.4% to $2.43 in 2012 and then by 16.5% and 5.3% more in the following two years. Assuming a multiple of 14.5x and a conservative 2012 EPS of $2.78, the rough intrinsic value of the stock is $40.31, implying 26.3% upside. Modeling a CAGR of 7.2% for EPS over the next three years and then discounting backwards at a WACC of 9% yields an even higher figure of $38.16.
Royal Caribbean, however, is more attractive and a safer pick, despite the lower dividend yield and higher beta. Outlook has improved and ticket prices have held up well despite a challenging macro environment. With the fourth quarter earnings call scheduled for January 26, investors can expect to see greater volatility going towards that date. As 4Q is seasonally weak and more or less meaningless for the firm, investors will be focused on 2012 guidance. If Carnival is any indication, guidance will be disappointing. I anticipate that investors will receive the guidance better than how they did for Carnival's. This is so because Royal Caribbean has outperformed over the last few months with strong close-in bookings. In addition, the company has experienced greater strength in North America than Carnival has due to more favorable pricing trends.