Why Carnival Shares Could Sink Further In 2012

| About: Carnival Corporation (CCL)

Carnival Corporation (NYSE:CCL) doesn't seem to have much luck lately. The company owns the Costa Concordia cruise ship which recently ran aground off the coast of Italy. The news of that disaster was spread in headlines around the world and it appears to have had an impact on cruise bookings. If that wasn't enough to make some tourists reconsider booking a cruise, more recent headlines might: Just days ago, Carnival Splendor passengers were robbed at gunpoint in Puerto Vallerta.

But wait, there's more: The Costa Allegra which is also owned by Carnival Corporation had a fire erupt recently with over 1,000 passengers and crew members aboard. The ship is being towed to the Seychelles now. With three major incidents in 2012 that present potential safety risks, some customers might not book their next cruise with Carnival. Aside from those company-specific issues, Carnival is facing other challenges such as high fuel prices, which continue to rise with oil. Carnival has exposure to the European consumer who, due to a debt crisis and austerity measures, might not be cruising this year but rather taking a "staycation."

Carnival Cruise Lines owns and operates under many brands which include Aida, Seabourn, Holland America Line, Princess Cruises, Cunard, Cunard, Ibero Cruises, P&O Cruises and Costa Cruises. With the stock trading for about $30 per share, it could see additional downside. Based on all the headwinds facing the company, earnings estimates could be too high for 2012, and the stock which was recently
downgraded to a sell by Zacks, could see more analyst downgrades in the coming weeks and months.

With two high-profile incidents in just the past couple of months, the Costa Cruises brand appears to have an uncertain future. Some analysts and investors believe that Carnival might have to spend a considerable amount of money to re-brand or otherwise dispose of the brand. This is also likely to make headlines and add to expenses in the coming quarters. With the stock trading at about $30.50 per share and earnings estimates at $2.18 per share for 2012, the price to earnings ratio stands around 14 times. Those estimates look vulnerable with all the headwinds, and the price to earnings ratio looks expensive when you consider that the average S&P 500 Index stock trades around 12 times earnings. Carnival shares have longer-term rebound potential, but the shares are likely to be a value-trap or even drop further. Patient investors should consider waiting for the stock to come closer to an average market multiple of 12, which based on $2.18 per share in earnings, could put the stock closer to $25 per share.

Key Data Points From Yahoo Finance:

  • 52-Week Range: $28.52 to $41.95
  • Dividend: $1 per share, yields 3.3%
  • 2012 Earnings Estimate: $2.18
  • P/E Ratio: about 14 times earnings

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

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