Abandon Ship: Time To Stay Away From Carnival And Royal Caribbean

Includes: AON, CCL, DIS, RCL, XL
by: Chris Katje

The title of the article seems like a no brainer. For anyone who doesn’t know the story, a ship called the Costa Concordia hit a reef on Friday and partially sank. The ship is owned by Costa Cruises, a wholly owned subsidiary of Carnival Corporation (NYSE:CCL). The lasting impact of pictures of the disaster as well as the extensive media coverage are likely to put a black cloud over the cruise line sector as a whole and lead to less booked cruises in 2012.

Carnival Corporation has a near 50% market share of the cruise line industry with Costa Cruises, representing around 7% of the world’s cruises; Royal Caribbean (NYSE:RCL) enjoys around a 23% market share. Disney’s (NYSE:DIS) cruise line segment has around 3% of the cruise line market share.

The months of January to March are considered the peak season for reservations for cruises. Cruises are normally taken in the summer as people have time off of work or school and generally plan them months in advance. Obviously the disaster is costly, but it also could not have come at a worse time. Rival cruise lines like Royal Caribbean are likely to suffer along with Carnival. Along with a loss of reservations, all cruise lines are likely to see cancellations from families and individuals who have already booked a cruise. People will choose to stay at home or take a short vacation, which they perceive as a safer option. Norwegian Cruise Lines was scheduled to go public in the United States in 2011 and I do not see them trying again in 2012.

The disaster off of Italy’s coast is likely to lower confidence tourists have in taking cruises. Vacations are supposed to be stress-free, or as close to it as possible. Many Americans, and people all over the world, were afraid to fly for some period after the September 11th plane crashes. The cruise line industry is likely to suffer for 2012 as it discounts trips dramatically to ensure occupancy, which will heavily cut into operating margins.

The Costa Concordia ship will be out of service for all of 2012, which will take away any trips that were already booked aboard, and will likely cost Carnival between $85 and $95 million in revenue. There is a possibility that the cruise ship will be written off as a loss if it is not repairable, similar to a car being “totaled” from an accident. The loss for this year alone represents $0.11 to $0.12 in earnings per share for fiscal 2012. Over $550 million was spent in the construction of the ship back in 2006.

Carnival released a statement Monday regarding the financial impact of the disaster. In the statement, the company disclosed it has a $30 million policy on the Costa Concordia for damage and also has a $10 million deductible through a personal injury liability policy.

Investors had to wait an extra day to sell or short any cruise line stocks due to the market being closed for Martin Luther King Jr. Day. Shares of Carnival Cruise Line also trade on the London Stock Exchange with the symbol CCL. During Monday’s trading session, the shares were down 16.5%.

XL Group (NYSE:XL) is one of the insurers of the Costa Concordia. The shares are likely to see a decline on Tuesday, as the market resumes trading from the holiday weekend, as well. Aon (NYSE:AON) is also listed as an insurer for Carnival Corporation and could be hurt by the disaster.

Earnings for Carnival were expected to be $2.70 a share on revenue of $16.4 billion. Fifteen analysts, listed on Yahoo Finance, had a price target of $41.55, prior to the disaster. The earnings estimates and price targets will have changes over the next couple of weeks.

In conclusion, I see shares of Carnival likely trading down to $25 (-27%) at some point during this trading week. Royal Caribbean shares will likely trade down 10% during the week. Just as BP shares were an investing option when they bottomed out after a disaster, some analysts and investors will think about buying shares after a huge drop. I will be staying away from shares of Carnival and Royal Caribbean.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.