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Gamble of the week: cruise-line operater with strong fundamentals

20.07.2007

by Tim Price

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Cruising is no longer just for oldies, reckons the FT’s Lex column. The average age of today’s cruise passenger is 54, down two years on a decade ago, according to the Passenger Shipping Association. At the same time, passenger numbers have risen – by 11% a year between 1996 and 2006, says investment bank UBS. Fundamentals would appear to be behind the cruise industry.

Gamble of the week: Carnival (CCL.US)

That’s good news for Carnival Corp, the world’s largest cruise company. Carnival owns and runs cruise ships across the globe. Its brands include Carnival, Princess, Cunard, P&O, Swan Hellenic and Ocean Village. By its own reckoning, Carnival serves a customer base of seven million holidaymakers annually.

In the short term, Merrill Lynch earlier this week released a research note on the cruise-line industry, indicating that overall pricing trends for sailings in the third quarter remain positive, with modest improvements since June. The broker expects Carnival’s third-quarter net yields (the cruising equivalent of same-store sales) to be inline with, or a little higher, than 2006’s levels. Carnival recently reported quarterly earnings per share of $0.48 versus $0.46 last year and consensus estimates of $0.47. Revenues were up 8.9% year-on-year; and stripping out higher fuel costs, net cruise costs were flat. Broker Stifel Nicolaus has a target price of $58 for the stock, based on a forward p/e multiple of just over 17 times (the historic range has been between nine and 27 times).

Brokers are pretty mixed when it comes to assessing Carnival – 23 cover the stock; 12 rate it a ‘buy’; ten a ‘hold’, and just one, Erik Helberg of Pareto Securities, considers the stock a ‘sell’. While the sector runs the risk of an economic downturn, geopolitical tension and a rising oil price, it should also benefit from a longer-term secular tailwind – namely, demographics, as the Western population grows older and people across the world generally become wealthier, particularly within Asia. Over the last five years, Carnival has delivered total returns including dividends (its current gross yield is just under 3%) of 92%, beating the S&P 500 index by some 25% and also beating the S&P 500 consumer discretionary index by more than 40%.

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Carnival is undoubtedly a cyclical stock with significant vulnerability to higher oil prices. However, investors with an appetite for risk and who buy into the globalisation and ageing themes could do worse for their money. Of course, those wary of getting exposure to the US dollar (and the US consumer) should probably look elsewhere.

Recommendation: BUY at $47.20

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