The now well-known and tragic fate of the Costa Concordia cruise ship which ran aground off the coast of Italy is just one issue for Carnival Cruise Lines (NYSE:CCL) that still continues to impact the company and the entire cruise industry. However, investors should be focusing their attention to what could be an even bigger problem, and that is the debt crisis and weakening economy in Europe. The situation in certain countries like Spain, Portugal and now even France seems to be accelerating to the downside. Spain has extremely high unemployment level, at about 24%, and it could get worse as new austerity measures are put into place.
The same debt problems that have impacted Greece seem to be spreading to Spain and other countries. This could have an impact on Carnival Cruise lines going forward especially since many investors based in the United States might not yet realize that Carnival (through its subsidiaries) has significant exposure to the European consumer. Carnival Cruise Lines owns and operates under many brands, some of which are based in and target European consumers. These are some of the brands:
Aida, which is geared towards Germans.
Ibero Cruises which targets the Spanish market.
Other brands owned by Carnival include Seabourn, Holland America Line, Cunard, P&O Cruises and Costa Cruises, all of which have significant cruise routes in Europe or exposure to the European consumer. When many investors based in the United States think about this company, they think Carnival or Princess Cruise lines, which do not have as much exposure to the European economy. I believe analysts and investors have underestimated the potential downside in Carnival shares over Europe, and with the headlines in Europe continuing to deteriorate, it won't be hard for many vacationers in Spain, France, Germany, etc., to opt for a "stay-cation" at the local beach rather than spend money on a more expensive cruise.
Royal Caribbean Cruises (NYSE:RCL) does not have as much exposure to the European market or consumer. Even so, the company still reported earnings that disappointed some investors, and the stock fell sharply after the report. In particular, Royal Caribbean's "2012 Outlook" seems to specifically cite Europe as a significant concern and point of weakness, it states:
Overall, pricing remains in line with or higher than the same time last year for all major itinerary groups with the exception of Europe...The Caribbean and Alaska remain healthy and as expected, a wide range of outcomes still persist regarding Europe this summer. While the marketplace is still volatile and uncertain, we are narrowing our yield and EPS ranges to reflect our best estimates at this time.
If a company with relatively limited exposure to Europe like Royal Caribbean can lower guidance, then the impact could be much greater for Carnival, as the European economy continues to weaken into 2012. Carnival shares have managed to spend most this year just barely over $30, but I believe the next couple of earnings reports could send the stock below that level. This is based on the chance of further reductions in earnings and guidance, plus the fact that the stock is trading at a price to earnings ratio of around 20, which is well-above the market average.
If Carnival shares were to trade at the current market price to earnings multiple, (The S&P 500 Index average multiple is about 13), the stock could be valued at just $21 per share. I don't expect the shares to go that low, but the stock appears to have more downside than upside, based on all the factors above. The current valuation of Royal Caribbean, at just about 13 times earnings, also supports the case for a lower stock price with Carnival, sooner or later.
Key Data Points For Carnival From Yahoo Finance:
52-Week Range: $28.52 to $41.95
Dividend: $1 which provides a yield of 3%
2012 Earnings Estimate: $1.59 per share
2013 Earnings Estimate: $2.32 per share
P/E Ratio: about 20 times earnings
Key Data Points For Royal Caribbean From Yahoo Finance:
52-Week Range: $18.70 to $42.30
Dividend: 40 cents which provides a yield of 1.5%
2012 Earnings Estimate: $2.13 per share
2013 Earnings Estimate: $2.77 per share
P/E Ratio: about 13 times earnings
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.