Carnival Cruise Line (CCL) ($39.76)
by Jerel H. Novick
Carnival Cruise Line is the world’s largest cruise operator with about 50% of the world market (the next two players have 25% and 15% market share). They have 11 brands that range from economy (Carnival) to luxury (Cunard). Carnival currently operates 85 ships with a total passenger capacity of 158,3521. Between ’08 and ’12 they are set to take of 22 ships with a passenger capacity of 51,338, an increase of 32.4% over current capacity. The breakdown by year is:
2008: 13,310
2009: 11,412
2010: 12,158
2011: 9,280
2012: 5,178
It is likely that some older ships will be retired or sold off but at this point they have not indicated that they will be doing that. The Carnival Splendor will debut in July in Europe. For its first season it will offer mostly 12 day packages from London (Dover), England.
The stock is trading at 13x past earnings, 12x forward earnings with a 4% dividend. The historic P/E is 15-16x. It has not been this cheap since post-9/11 when the industry virtually shut down. The current economic situation/outlook is much brighter now.
The entire industry has whacked by fuel prices. Carnival estimates that 2008 fuel will be about $532 mill higher than fiscal 2007. Fuel was 12.4% revenue in Q1 08 up from 8.2% a year ago. CCL does not hedge fuel cost (rival Royal Caribbean hedges 60-80% of their fuel costs). Carnival is making a bullish call that fuel prices will ease from their current levels and they do not want to be locked in at a higher price. They pass the higher fuel costs directly on to passengers via surcharges. Passengers are currently being charge $7/per person per day for the 1st two occupants in a cabin (capped at $98 per voyage). The 3rd and 4th passengers in a cabin are charged $2/per day (capped at $28). This will cover most but not all of the higher fuel costs.
Net income and earning remain positive but their rate of growth has slowed. The more important metric for the industry is net yield which is rate of return after subtracting expenses. This measures net income earned per passenger per day. In Q1 082 grew yield by 6.2% and is expected to grown by 5.1% in FY 08 and by 2.6% in FY 09.
Cruising is less cyclical then you would think. Cruisers tend be loyal repeat customers. Tough economic conditions may cause them to “trade down” in brands. Cruising represents a value vacation option, 20-30% cheaper than a land trip, and may itself be a trade down option. There is also a huge market potential. Only 17% of Americans cruise. 40% of revenue comes from outside the US. Approximately only 1-2% of Europeans cruise but in 2007 they carried 20% more European passengers. As a result they are shifting capacity from the Caribbean, which is a very competitive market, to Europe. Business in the Mediterranean has grown 20% each of the last two years. European cruise represent a value alternative for Americans since they are able to go to Europe and not have to pay to stay in for hotels or food in Euros. Passengers from Asia represent only 5% of the world cruise market but this is expect 40% by 2010. In response to this they are now basing some ships in Asia and their Costa brand has established a permanent office in Asia. The weak dollar makes cruising on North American brands (Carnival, Princess, Holland America, Seabourn and Cunard3) attractive since they denominated in dollars but paid for in their local currency. Carnival does hedge most of their currency exposure. The aging baby boomer population is expected to gravitate toward cruising.
The company is reporting strong bookings out through early Q2 09. They have reported that they are showing some pricing power in selling trips (they are getting the bookings early and at higher prices or with less discounts than last year). In the Caribbean especially, which is a very price competitive, they have shown a great deal of price traction.
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1Industry wide capacity is calculated based on 2 passengers to a cabin even though some cabins may carry 3 or passengers on a particular voyage.
2Fiscal year end is November 30.
3Cunard is counted as both a North American and UK brand.