A Safer Investment Than Carnival

Everyone loves to go on vacation. Therefore, the idea of investing in cruise lines might drum up some excitement. However, the industry is in a difficult environment, primarily due to geopolitical tensions and high fuel prices. And when it comes to Carnival (NYSE: CCL  ) , you can add reduced traveler confidence.

Safety concerns
Carnival's safety track record over the past two years is abysmal. On January 13, 2012, in calm waters, the Costa Concordia crashed into an outcropping off Giglio, an island off the coast of Italy. Thirty-two people perished. This led to reduced bookings as travelers began to distrust the brand, especially in Europe. 

It took time for Carnival to reestablish its brand as safe and reliable. Then, in February 2012, the engine on the Carnival Triumph caught fire. Following that frightful event, in March 2013, the Carnival Dream was docked due to equipment problems. And in October 2013, a six-year-old boy drowned in a pool on the Carnival Victory. This tragic event has quickly led to a debate over whether or not Carnival should have lifeguards at its pools. The logical answer is "yes." However, Carnival might not be so quick to act considering that it's already spending between $600 million and $700 million to improve guest satisfaction. The dilemma here is that once this news becomes mainstream and reaches families who have potentially considered traveling on a Carnival ship, they're likely to opt for a company with a better safety track record.  

Safer sailing
For instance, thanks to a better safety track record, Royal Caribbean (NYSE: RCL  ) has benefited from Carnival's woes. While Carnival's net revenue dropped 3.8% in its most recent quarter (third quarter) year over year, Royal Caribbean saw its most recent quarter's (second quarter) revenue improve 3.4%. Travelers simply feel safer with Royal Caribbean. However, this doesn't mean that Royal Caribbean is a slam-dunk investment. It has been cutting costs aggressively, but the company has reduced its second half ticket revenue guidance by 90 basis points, and Credit Suisse expects its pricing to decrease 5.2% over the next 12 months.

Norwegian Cruise Line (NASDAQ: NCLH  ) has suffered recent stock depreciation along with its peers. For instance, the stock dropped 6.48% over the past month versus 5.18% for Royal Caribbean and 14.67% for Carnival. However, there seems to be more bullishness surrounding Norwegian Cruise Line recently. This relates to its new ships which include the 4,000-passenger Norwegian Breakaway (April 25, 2013). Two Breakaway Plus vessels are expected to be delivered in Fall 2015 and Spring 2017. Norwegian Cruise Line's Norwegian Epic (4,100-passenger capacity) has also received accolades from passengers. Readers of Travel Weekly rated it "Best Overall Cruise Ship" two years in a row. This is in addition to Cruise Critic rating it "Best Ship for Sea Days."

In an interview on CNBC, C. Patrick Scholes, SunTrust Lodging Cruise Line Analyst, stated that while Carnival should see negative pricing pressure of at least 4% over the next 12 months, Norwegian Cruise Line should see pricing up 5% over the same time frame. He also set a $26 price target for Carnival (currently trading at $32.08), and a $46 price target for Norwegian Cruise Line (currently trading at $30.25).

Carnival attempts to fight through adversity
Not much of the news for Carnival is positive, and rightfully so. The company simply hasn't taken all the necessary steps to keep its passengers safe. However, Carnival is still fighting back with brand-building initiatives: a major travel outreach program, a marketing campaign featuring primetime television ads, and the introduction of its Great Vacation Guarantee (if you're not satisfied with any three to eight day Carnival vacation, you receive a 110% refund.)

While these initiatives have potential, Carnival has lowered its fiscal year 2013 guidance. It expects net revenue to decline 3% and non-GAAP diluted earnings per share to come in at $1.51-$1.57, with higher fuel prices providing a $0.04 drag. Carnival expects current challenges (geopolitical tensions/subpar demand) and cost pressures to continue throughout next year. 

Stay dry
Due to current industry trends and the company's poor safety track record, which has led to reduced traveler confidence and demand, Carnival doesn't look to be a good investment. Norwegian Cruise Line should offer the most potential, but it still must fight against weakening industry trends. 

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Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On October 22, 2013, at 12:45 PM, stoner656 wrote:

    sorry to say but you are way off here!

    carnival corp. owns over 100 ships in its world wide fleet, moves over 17 MILLION PASSENGERS a year, owns a fleet of passenger rail cars for add on tours for its cruise passengers, as well as owning ship dry docks for ship repairs etc.

    you cannot judge a company that has a problem with less then 5% of its world wide fleet of ships.

    i am a shareholder in this well run company, one great assurance here is that its founders hold a large stake of ownership in this company, and they are not going to allow anything to happen to it.

    carnival is at the head of its class when it comes to delivering a first class vacation any type of trip from a few days in the bahamas to a classic trans-atlantic crossing or a 'round the world voyage.

    in closing do some investigative research before writing such a flawed article

  • Report this Comment On November 10, 2013, at 2:19 PM, Robyn100 wrote:

    I completely agree with the previous user's comment. On the Dream the backup generator (which has never been used except for schedule testing) didn't test at 100%. The new faulty generator is the manufactures fault, not Carnival's. The Dream could have easily sailed, and I commend Carnival for putting passengers and crew first, choosing not to sail without a 100% working backup generator. A new generator was installed, and Carnival took excellent care of all passengers needs in getting them home.

    As for the young boy drowning it was indeed tragic, but I blame the parents for not watching their son, that goes without say, especially if he didn't know how to swim. They have Carnival Camp for kids that age if you don't want to have your kids with you all the time. Not sure if they have a wading pool or not on the Dream.

    Carnival has had 3 ships with mechanical incidents if you count the Ecstacy, and having over 100 ships cruising 24/7, 52 weeks a year for many, many years, Carnival has done an outstanding job providing great vacations for millions of people. Things happen, and Carnival has the best working for them, they always make sure the ships are working like they should, up date and or replace if needed. I've taken 23 cruises with Carnival, recommend Carnival 100%, and will continue to cruise with the # 1 cruise line. The only complaint I have about Carnival is they no longer have the share a cabin option for single

    passengers. Now it's double the cost, so cruising less now. :( I don't work for Carnival, I do have long time friends who are Senior officers with Carnival for years, they love Carnival like family, and I love cruising with the best. In closing, I feel completely safe cruising with Carnival.

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