Why I Would Sell Overpriced Carnival Shares To Buy United Airlines

Includes: CCL, RCL, UAL
by: Hawkinvest

United Continental Holdings Inc., (NYSE:UAL) and Carnival Corporation (NYSE:CCL) have a few things in common, and investors considering Carnival shares should look at United Airlines stock. Both of these companies are challenged by high oil prices and this often lowers profit margins. Fuel is one of the single largest expenses for an airline or cruise line. Both of these companies serve the tourist and leisure industry although, United Airlines also serves the business traveler. Another common point is that both of these companies are impacted by economic cycles. When the economy is strong, people fly for vacations and business travel and they take cruises. Both of these companies transport people on vacations and have similar risks in terms of fuel costs. Both are also exposed to downturns in the economy, but one stock is priced at a steep discount to the other. Here is a closer look at both companies, plus Royal Caribbean Cruises (NYSE:RCL) shares. Price targets for all three stocks are included below, which adds validity to the beliefs set forth in this article. After seeing the comparisons below, it's easy to see that United Airlines stock is a real value that should be considered and that Carnival shares look expensive when compared to both United and Royal Caribbean:

United Continental Holdings Inc., is one of the world's largest airlines. Because of this, it is also an easy target for shorts who use this stock as a way to profit on rising oil prices. Recent data shows about 38.4 million United Airlines shares are short. Based on average daily volume of about 5.4 million shares, the shorts represent about 7 days of trading volume. I think shorts have over done it with United because the company uses hedges to minimize the potential volatility of fuel prices, plus this company is poised to benefit from increased business travel as the economy improves and unemployment drops. United is expected to earn over $5 per share in 2013, and that puts the price to earnings ratio at a super-cheap level of just 4 times forward earnings. Furthermore, analysts expect earnings to grow by almost 20% from 2012 to 2013. When buying United Airlines, investors receive much stronger earnings power when compared to Carnival, and a much lower stock price. Barclays Capital recently set a $32 price target for United Airlines stock.

Here are some key points for UAL:

  • Current share price: $19.35
  • The 52 week range is $15.51 to $26.84
  • Earnings estimates for 2012: $4.65 per share
  • Earnings estimates for 2013: $5.66 per share
  • Price to earnings ratio: about 5 times earnings
  • Annual dividend: none

Carnival Corporation is one of the world's largest cruiselines. It operates many brands including: Carnival Cruise Lines, Seabourn, Holland America Line, Princess Cruises, Cunard, AIDA, Cunard, Ibero Cruises, P&O Cruises and Costa Cruises. A number of these cruise lines are based in and target the European cruise market. With many European economies just now entering a recession, consumers in that region might not be as likely to go cruising this year. In addition, the Costa Cruises had a major incident off the coast of Italy when the "Costa Concordia" cruise liner capsized. This left many passengers stranded and others were even more tragically impacted. This incident has put a cloud over the Costa Cruise line in the eyes of many consumers, and for some, even the whole idea of cruising. Carnival has had expenses and claims relating to that incident and it is also seeing reduced levels of bookings. Earnings estimates have come down sharply in recent weeks and many analysts are expecting about $1.67 in earnings.

Estimates for United Airlines are expected to be nearly triple that level. Not only is United expected to earn more, but the stock sells for less than $20 per share, while Carnival shares trade over $30. Furthermore, United does not have company specific issues or claims to deal with related to the Costa Concordia. I believe that investors who are attempting to go bargain-hunting in Carnival stock are way too early and are paying too much. United Airlines shares are a good example of how low valuations can go, and if Carnival stock was trading at the same price to earnings ratio as United, the shares would be well below $15. I don't believe Carnival shares will go that low, but it seems that the low to mid $20 level is very reasonable. Carnival shares were trading around $32 per share just before the Costa Concordia incident, and the stock is barely changed from that level. What has changed is the earnings estimates for Carnival. Investors should not be paying about $32 per share for this stock because earnings estimates have dropped sharply, plus this stock appears expensive when compared to Royal Caribbean. Barclays Capital recently downgraded Carnival shares and has a $26 price target on the stock.

Here are some key points for CCL:

  • Current share price: $31.92
  • The 52 week range is $28.52 to $41.95
  • Earnings estimates for 2012: $1.67 per share
  • Earnings estimates for 2013: $2.35 per share
  • Price to earnings ratio: about 20 times earnings
  • Annual dividend: $1 per share which yields about 3.2%

Royal Caribbean Cruises is another leading cruise line. This stock also looks to be a better value when compared to Carnival shares. Earnings estimates for 2012 are considerably higher than those of Carnival's. In addition, Royal Caribbean shares trade for less per share when compared to Carnival. This stock doesn't have the headline risk of claims, lawsuits and branding issues that Carnival has due to their Costa Cruise incident. Royal Caribbean Cruises could even be a beneficiary of the Costa Cruises incident, if consumers decide to pick this company since it has not had major incidents recently. Barclays Capital has a $30 price target on this stock.

Here are some key points for RCL:

  • Current share price: $29.01
  • The 52 week range is $18.70 to $45.45
  • Earnings estimates for 2012: $2.24 per share
  • Earnings estimates for 2013: $2.91 per share
  • Price to earnings ratio: about 12 times earnings
  • Annual dividend: 40 cents per share which yields about 1.4%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I am long UAL.