Carnival Corporation Shares Overvalued With PR Mess

| About: Carnival Corporation (CCL)
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Picture an advertisement for a cruise in the Bahamas. It could be a commercial, print ad, or travel agent trying to sell you on taking a once in a lifetime trip to a faraway destination. Now imagine an advertisement using any of the following:

· "Conditions are getting worse by the hour"

· "Cabin carpets are wet with urine and water"

· "We are having to sleep in the hallways"

· "We stood in line for four hours to get a hamburger"

· "Elderly and handicap(ped) are struggling"

These are some of the posts shared by the NY Daily News about a Carnival (NYSE:CCL) cruise ship. A fire aboard the Carnival Triumph, one of several large cruise ships from the world's largest cruise line, is causing a public relations nightmare for the company. With the advancement of social media, guests on the boat have been tweeting and posting horrible conditions aboard the ship.

The cruise ship, that is over 2.5 times the size of a football field, is currently being towed to Alabama. Carnival CEO Gerry Cahill had this to say Tuesday, "I need to apologize to our guests and to our families that have been affected by a very difficult situation." Carnival isn't apologizing well enough as passengers seem mad about conditions on the boat. Several news outlets, including Good Morning America, have also talked to people on the ship or their family members.

An apology to all passengers on the cruise ship will come in the form of a refund. That's right, all the company has officially promised to passengers who have seen horrible conditions, used buckets as bathrooms and gone hungry, is their money back. This has lawsuit and PR nightmare written all over it. With the Carnival Triumph out of service, the company has had to cancel two fully booked cruises on the same ship that were planned for the next two weeks.

The cruise ship has a capacity of 3,143 passengers. That equates to over 9,000 passengers that will see full refunds from Carnival, equaling tens of millions of dollars. Guests who were booked for future cruises on the Triumph will get a refund and credit towards a future booking. This represents one way Carnival will try and gain customers going forward, but also leaves the current stranded passengers with less compensation than future ones.

The Costa Concordia disaster was just over a year ago. The Carnival-owned ship killed 32 passengers and hurt the company's image. There are currently 11 pending lawsuits relating to that cruise ship disaster. That incident hit earnings for fiscal 2012 and also slowed bookings down in the second half of the year.

Carnival is the leader in the cruise line industry, competing against Royal Caribbean, Norwegian Cruise (NASDAQ:NCLH), Disney (NYSE:DIS) and other small players. The company has around a 50% market share in the industry. The busiest time for cruise bookings is the months of January, February and March. Bookings could now see a decline, which will lead to discounts from Carnival or sailing with boats at less than 100% capacity. Either of these will hurt revenue and earnings per share for the next several quarters.

Last January, I urged investors to "Abandon Ship" and stay away from Carnival and Royal Caribbean (NYSE:RCL). At that time, the Costa Concordia cruise ship disaster had killed 32 people and created a disaster for Carnival and its shares. Since that time, shares have shot up 32% and now trade at their highest levels since May of 2011. I don't think shares can maintain these levels and am waiting for investors to digest the financial impact of this disaster.

Analysts on Yahoo Finance expect the company to post earnings per share of $2.42 in fiscal 2013. That number would be a huge increase from last year's $1.88 posted by the company. Estimates will come out soon, but earnings per share will be hit by at least $0.10-$0.12 in similar fashion to last year's disaster. Earnings of $2.32 would represent a stock trading at 17 times current earnings. Shares are overvalued at these levels and will come down as losses on revenue and bookings are realized.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.