Is Carnival Currently Attractive?

| About: Carnival Corporation (CCL)
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Carnival Corp. (NYSE:CCL) owns and operates cruise ships globally. If you have ever traveled aboard any ship from Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn, P&O, Cunard, AIDA, Costa or Iberocruceros, you have been a Carnival costumer since they are all brands of the company.

Since the Costa Concordia accident, the company has found it difficult to separate itself from some media attention regarding its ships and, unfortunately, other incidents have happened. In the first quarter of the current year, the company had the problem with the Triumph cruise ship, and more recently some engine problems have lead to cancelled cruises and increased repair costs. These situations might be putting at risk customers' perceptions about the company, and may or may not impact its long-term financial performance. After all, we all know how difficult it is to have the trust of a customer, and how easy it is to lose it.

The company is currently trading at around $27 billion, having lost almost $5 billion in market cap since the Triumph situation started. While it's expected that the company won't face that kind of financial loss, it's also difficult to say if this was just a lot of bad luck.

That said, in order for an investment opportunity to arise, the actual market price should be discounting both the current problems and the probability of future problems. Let's try to see if this is the case currently.

Q1 2013 2012 2011 2010 2009
- Revenue (in millions) $15,382 $15,793 $14,469 $13,460
- Operating income (in millions) $1,815 $2,255 $2,347 $2,154
- Net income (in millions) $1,298 $1,912 $1,978 $1,790
- Earnings per share $1,88 $2,42 $2,47 $2,24
- Total assets (in millions) $38,675
- Long term liabilities (in millions) $8,370
- Total equity (in millions) $23,523
- Goodwill (in millions) $3,143

In 2012, the company faced extraordinary costs because of the Costa Concordia tragedy, with results coming in below average. In order to have a clearer picture about the kind of results that the company can achieve, let's use the 2010/2011 performance, since it catches the pressure that consumers continue to face. Also, since the company currently expects 2013 results in the $1.8-$2.1 per share range, let's assume the low end as a margin of safety and, in the next few years, the recovery to the 2010/2011 level. This should provide a margin of safety in case more trouble should arise.

EPS Price with P/E=10 Price with P/E=15 P/E at current market price ($33)
2013 $1.8 $18 $27 18,33
2014 $2.4 $24 $36 13,75

The current multiples indicate that the market is not expecting too much trouble from the current issues regarding Carnival. This might be because either investors trust the company's ability to solve the current issues without any more incidents, or because they expect the costs to be contained. In a scenario where the current issues will be solved without further incidents, the actual higher valuation might make sense and may present an opportunity to invest in the company and make a 10% return with the company returning to the 2010/2011 results.

But in case there should be any more problems, the current market prices do not offer an adequate margin of safety. Cancelled cruises, accidents or problems surging in the other brands ships will bring investor confidence down and, as a consequence, both market multiples and earnings would be lower. In this case, it should be easy to imagine a P/E ratio closer to 10 and results at or below $1.8 per share.

If there aren't any more troubles, this might be an attractive market price. But you are not protected against any negative surprises.

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.