Analysts' Choice: Carnival Charts Course For Growth

12/12/2016


  Recent Price
$53
  Dividend
$1.40
  Yield
2.6%
  P/E Ratio
16
  Shares (millions)
739
  Long-Term Debt As % Of Capital
27%
  52-Week Price Range
$55.77 - $40.52

Favorable demographic trends and robust consumer confidence are powering Carnival's ($53; CCL) operating growth — but not its share price, down 2% in 2016. Earning a Value score of 85, the stock looks too cheap to pass up, especially as its operating momentum seems likely to carry into fiscal 2017 ending November. The stock is a Buy and a Long-Term Buy.

Business breakdown

Over the past five years, Carnival has controlled nearly a 50% share of global cruise industry's passengers and capacity. The cruise industry is highly concentrated, with the largest four companies taking nearly 90% of the market. High costs to construct new cruise ships, some exceeding $500 million, and limited shipbuilding capacity seem likely to deter new competition from entering the market.

Carnival operates about 100 cruise ships and plans to expand capacity 3% to 4% annually through 2020. Over the past five years, its capacity growth has averaged 3%. Growth efforts for both the company and its rivals will focus on China, where Carnival has operated for about a decade. Carnival projects that 4 million people in China will take annual cruises by 2020, up from about 1 million last year.

Ticket sales account for about three-fourths of Carnival's revenue, with the remainder coming from onboard spending by passengers, transportation between airports and ports, and commercial-property leases. For the first nine months of fiscal 2016, sales growth benefited from higher capacity, occupancy rates, and onboard spending. North America accounts for 60% of Carnival's capacity, with the rest coming from Europe, Australia, and Asia.

Annual operating profit margins are on pace to reach their highest level in nearly a decade, due to cost cuts and lower marine-fuel prices. Fuel costs fell 35% in the first nine months of fiscal 2016 and accounted for just 9% of cruise operating expenses, versus 14% for the same period last year. Rebounding fuel prices could pressure profit margins, though management has hedged slightly more than 50% of expected fuel needs for 2017 and less than 50% of fuel for 2018. Starting in 2019, Carnival will add to its fleet a new line of cruise ships that offer better fuel efficiency.

For the 12 months ended August, cash from operations rose 21% and free cash flow surged 38% to $1.13 billion. Carnival is not one to hoard excess cash on its balance sheet. In the past five quarters, the company has announced two dividend hikes, both of which exceeded 15%. Stock buybacks have lowered the share count 5% in the past year.

Conclusion

Carnival is expected to report per-share profits of $0.58 for the November quarter, implying 16% growth, on revenue of $3.92 billion, up 6%. Carnival has historically posted results in the week leading up to Christmas.

For fiscal 2017, analysts project per-share profits of $3.75, up 12%, on revenue growth of 5%. Shares trade below 14 times estimated fiscal 2017 earnings, a 14% discount to the median S&P 1500 consumer-discretionary stock. An annual report for Carnival Corp. is available at 3655 N.W. 87th Avenue, Miami, Florida 33178-2428; (305) 599-2600; www.carnival.com.

CARNIVAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Aug '16
1.92
vs.
1.75
4%
50.00
-
42.94
16 - 14
May '16
0.49
vs.
0.25
3%
53.21
-
45.74
18 - 16
Feb '16
0.39
vs.
0.20
3%
55.77
-
40.52
21 - 15
Nov '15
0.50
vs.
0.27
0%
54.59
-
47.42
22 - 19
           
Year
(Nov.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
15.71
2.70
1.05
54.59
-
41.86
20 - 16
2014
15.88
1.93
1.00
44.44
-
33.11
23 - 17
2013
15.46
1.55
1.00
39.95
-
31.44
26 - 20
2012
15.38
1.92
1.00
39.40
-
29.15
21 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
89
75
85
71
87
43
47

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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