Smooth Sailing Ahead for Carnival - Barron's

Shares of Carnival (CCL), the world's biggest cruise-ship operator, are down 20% from 52-week highs, and trade at just 13x 2009 earnings -- far below their historical mutiple of 16-18x. Barron's says investors would be well-advised to pick up the company at levels not seen since post-9/11.

All-inclusive cruises are a hidden recessionary treasure: they cost 20-30% less than comparable land vacations. Carnival beat Q1 estimates a few weeks ago, but lowered full-year guidance, largely due to massive fuel-cost increases. It has addressed the issue by initiating a $5/day fuel surcharge, which could go higher if oil prices stay above $100/barrel. If fuel costs drop, Carnival, which does not hedge fuel costs, will see immediate benefits. Its chief rival, Royal Caribbean Cruises (RCL), generally considered the weaker company, recently backed full-year estimates, noting customer resiliency despite a weak economy.

Other positives include a 3.8% dividend; a $1B share repurchase program which it plans to exercise "opportunistically"; and a massive tax advantage due to its being domiciled in Panama City. Another tidbit: There's plenty of room for growth, since only 17% of Americans has ever cruised, and about 8% of all Europeans. Barron's think shares could bounce 50% if the company hits its numbers, and more if fuel costs drop.

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Stockerblog notes that a post-Fidel Castro Cuba should be a boon for Carnival (a point not ignored by Barron's). He also offers nine more indirect Cuba plays.

It's admittedly rare that a policy of "non-hedging" is seen as bullish. Not surprising, though, considering Barron's bearish stance on oil prices and commodities.

Comments

[Ralph F:]

Both CCL and RCL are arguably also a good way to play the retirement of the baby boomers.

2008 Apr 06 01:49 PM

[Eli Hoffmann:]

Good point, Ralph. You highlight a common theme between Barron's piece on cruise liners and their article on Wyeth this week, which details a potential blockbuster Alzheimer's drug.

2008 Apr 06 02:27 PM

[MJC:]

One thing that is often overlooked by analysts is that both CCL and RCL offer shipboard credit to stockholders who own 100 or more shares. Very few companies offer shareholder benefits of any kind, and both these companies offer one that is equivalent to a very nice dividend. Depending on which company you cruise, and how long your cruise is, you can get anywhere from $50-$200 to spend onboard. This builds company loyalty as well as happy customers.

2008 Apr 07 08:47 AM