As the economy improves, the leisure/ tourist industry will be a major beneficiary. In this article, I run you through my DCF analysis on Carnival (CCL), and then triangulate the result with an exit multiple calculation and a review of the fundamentals compared to other leisure companies. I compare Carnival to peer cruise company Royal Caribbean (RCL), and casino company Las Vegas Sands (LVS). Among the three, I find the least upside for Carnival, with explosive upside for the other two companies.
First, let's begin with an assumption on revenues. Carnival finished FY2011 with $15.8B in revenues, which represented a 9.2% gain off of the preceding year: acceleration. Analysts model a 10.4% per annum growth rate over the next half decade, and I find that this is reasonable since it is basically in-line with what is expected for the S&P 500.
Moving on to the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I model cost of goods sold as 47% of revenue versus 22% for SG&A and 22% for capex. Taxes are estimated at 0% of adjusted EBIT due to the company's legal tax rights for incorporating in Panama. We exclude non-cash depreciation expenses to value base purely on operating metrics.
We then need to subtract out net increases in working capital. I expect this to be at around 1.6% of revenue. Taking a perpetual growth rate of 2.5% and discounting backwards by a WACC of 10% yields a fair value figure of $33.68, implying 5.1% upside. This WACC is calculated through the capital asset pricing model and factors in a beta of 1.41.
All of this falls within the context of a horrific ship wreck and weak operating performance. Management has noted:
"Our non-GAAP EPS for the first quarter was $0.02. The first quarter came in $0.06 below the midpoint of our December guidance. The $0.06 shortfall from our December guidance was driven by $0.04 from the Costa Concordia incident expenses not covered by insurance and $0.04 from the impairment charge related to the Costa Allegra. All the other items netted out to a favorable $0.02 per share as higher-than-expected revenue yields and cost savings, including lower advertising expenses, more than offset $0.06 of higher fuel prices".
From a multiples perspective, Carnival is fairly priced. It trades at a respective 15.6x and 13.8x past and forward earnings versus 10.6x and 9.9x for Royal Caribbean and 36.7x and 18.6x for LVS. Assuming a multiple of 16x and a conservative 2013 EPS of $2.23, the rough intrinsic value of Carnival's stock is $33.45 - roughly in-line with my DCF result.
Consensus estimates for Royal Caribbean's EPF forecast that it will decline by 21.3% to $2.18 in 2012, and then by 28.9% and 18.1% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $2.78, the rough intrinsic value of the stock is $41.70, implying 42.3% upside. Discounting backwards by a WACC of 10% implies a 15% margin of safety. It should be noted that all 21 of the revisions to EPS estimates have gone down for a net change of -21.6%. While Royal Caribbean is substantially undervalued, don't expect it to get lost customers from Carnival.
Consensus estimates for LVS's EPS forecast that it will grow by 27.2% to $2.57 in 2012, and then by 20.2% and 19.1% in the following two years. Assuming the multiple plummets to 25x and a conservative 2013 EPS of $3.04, the rough intrinsic value of the stock is $76, implying 32% upside. The company is led by top management and is an ideal investment for emerging market exposure. As the consumer economy develops in Asia, LVS is well positioned to take off like a rocket. Cruises have greater margin pressures than casinos, so the latter is also a safer investment.
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