Carnival Corporation: Unfair Reputation or Fairly Treated?

Source: http://www.carnival.com/cruise-ships.aspx

Some passengers that had to endure the Carnival Triumph nightmare referred to the ship as a floating toilet. As a whole, Carnival (NYSE: CCL  ) is not a floating toilet. The primary reason for the 'floating toilet' reference: overflowing sewage. Sometimes incidents like this can lead to an investing opportunity because the stock price is unfairly punished based on recent events that are likely to online have a short-term impact on the underlying business. Is this one of those situations?

Carnival Triumph nightmare

In addition to having to deal with overflowing sewage, passengers had to deal with limited food and no power. There were a total of 3,143 passengers on the Carnival Triumph, and several dozen of them are now suing Carnival for between $30,000 and $1 million in damages. Even if all of these former passengers were to win, this wouldn't have a long-term impact on Carnival.

On the other hand, this news being brought back to the surface doesn't help Carnival's reputation. For instance, imagine you didn't follow what went on in the cruise line industry and you were planning a cruise for this summer. If you stumbled upon this news and learned about this somewhat-recent incident, then you would likely opt for another cruise line such as Royal Caribbean (NYSE: RCL  ) or Norwegian Cruise Line (NASDAQ: NCLH  ) .

Furthermore, while Carnival states that the equipment on the Carnival Triumph was properly maintained and that inspectors deemed the engine fire that started this mess to be an accident, Judge Donald Graham ruled that Carnival had been negligent in maintaining equipment in a pre-trial ruling. This also doesn't help Carnival's reputation.

Horror stories 

Carnival passengers told horror stories of their five days at sea, approximately 250 miles off the Mexican coast. While dealing with the challenges mentioned above, there was no air-conditioning while the passengers experienced constant heat, and children clung to their parents in fear while other passengers couldn't find their friends to confirm that they were safe. 

Carnival offered a full refund to every passenger, a free trip, and $500. Full refunds were the correct course of action. Offering the $500 was generous. However, it's logical to assume that most passengers won't take advantage of the free Carnival cruise. Some of them will never go on another cruise for the rest of their lives after such a traumatic experience. At least Carnival got everyone home safely.

Now that the situation has been established, what effects has it had on Carnival financially? Should Carnival now be seen as a bargain, or does Royal Caribbean or Norwegian Cruise Line offer a better investment opportunity?

Numbers and charts
Most investors look at valuation before anything else. That being the case, let's see how Carnival looks in comparison with its peers in this regard.

Carnival is currently trading at 29 times earnings, whereas Royal Caribbean and Norwegian Cruise Line are trading at 25 and 70 times earnings, respectively. Therefore, Royal Caribbean is the most affordable, and Norwegian Cruise Line is the most expensive. Let's see if these valuations are justifiable.

One of the best ways to determine whether or not a company's management is efficient is to see if its revenue is outpacing its SG&A expenses. With that in mind, consider the one-year chart below:

CCL Revenue (TTM) Chart

CCL Revenue (TTM) data by YCharts

Norwegian Cruise Line has grown the fastest, and its revenue has recently outpaced its SG&A expense. However, there isn't much consistency among these companies in this regard. While Royal Caribbean isn't growing nearly as fast, its revenue has consistently outpaced its SG&A expense since last July. What really stands out is that Carnival's SG&A expense has consistently outpaced its revenue by a wide margin. What that in mind, it wouldn't seem logical to invest in Carnival over Royal Caribbean, especially considering that Carnival is trading at a higher multiple.

Carnival does offer a dividend yield of 2.50%, which is more generous than Royal Caribbean at 1.90%, but considering the other factors -- PR challenges and lack of efficiency -- that shouldn't be enough to lead investors in Carnival's direction. Note: Norwegian Cruise Line doesn't offer a dividend yield, which is expected since it's reinvesting its capital in its growth.

Carnival does have one advantage -- it generated an impressive operating cash flow of $2.83 billion over the past year. Therefore, Carnival is capable of a turnaround. It can use this capital for marketing, ship refurbishments, increased capital returns to shareholders, and more.

The Foolish takeaway
Carnival has the potential for a turnaround, but right now it lacks efficiency and is dealing with major PR challenges. These headwinds have the potential to work against Carnival for the foreseeable future. Norwegian Cruise Line is growing the fastest of the three, but it's also the most expensive, or riskiest, investment. Royal Caribbean falls somewhere in the middle as it offers moderate growth potential, efficiency, a somewhat generous yield, and a fair valuation. Please do your own research prior to making any investment decisions. 

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Read/Post Comments (5) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2014, at 1:25 PM, RandiRN wrote:

    I was on a Carnival cruise that docked late (due to the ship detouring to the Caymans during the night to offload an injured passenger), then the DEA and Customs wouldn't let anyone off due to drug smugglers aboard ship. This wasn't Carnival's fault, but what transpired next was. It seems everyone on the ship missed their flights home from Florida. When I inquired at the purser's desk if I could get some help re-booking a flight home , I was refused any assistance by anyone from Carnival. It took me two days to find a flight home to NJ. A letter to Carnival after I arrived home was ignored. The problem was Carnival did nothing to help stranded passengers find a way home.

  • Report this Comment On March 11, 2014, at 2:48 PM, ru8661 wrote:

    I have been on 7 cruises in last 10 years. Always Carival. I have left from various ports (Miami, Jacksonville, Port Canaval, New Orleans, Tampa).

    I have been on the older ships and newer ships. I have stayed in inside cabins and suites.

    All I can say is each and every cruise was fantastic! It is the best value for the money!

    I have never experienced any problems with anything during the cruise (ship, staff, or any other part). If you have not gone on a crusie, you need to do one and see how you like it. If you have been and had a problem, things do happen, did you get home safe and alive? Try another cruise, I would say it will be better and you will enjoy!

  • Report this Comment On March 11, 2014, at 4:45 PM, yanodawg wrote:

    I have been on 19 Cruises, 10 of them on Carnival. We have never had any problems that were caused by Carnival or any of the other lines we have been on. I would not hesitate to cruise with Carnival.

  • Report this Comment On March 11, 2014, at 10:26 PM, MercenaryTrans wrote:

    Carnival sucks !!!!

    They don't care about the passengers after they get your $$ plain n simple !! There are those that have no problems on their cruises but only because of their dumb luck

  • Report this Comment On March 12, 2014, at 11:47 AM, geoherb wrote:

    Carnival Corp. is much more than Carnival Cruise Line. It includes Costa, Princess, Cunard, and Holland America, among others. One benefit of owning Carnival Corp. stock (100 shares minimum) is getting an on-board credit whenever you sail on any of its cruise lines.

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