Shrinking Margins Force Investors to Jump Ship

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

While Carnival Corporation's (NYSE : CCL) ships sail the high seas, the company's financial results have set an anchor. Revenue has stagnated while costs have risen. Profitability ratios show that the company is performing worse  from recent years. Can management steer the company back to smooth sailing?

Stagnated revenue
Total revenue is categorized into passenger tickets, on-board sales, and tours; which represent approximately 75%, 23% and 2% respectively. Since 2011 sales of passenger tickets have decreased 4.2% while on-board sales have increased 7.2%. Apparently the duty-free alcohol and cigarettes is too good a deal to pass up for any booze cruisers. All jokes aside, total revenue grew .5% YOY, and decreased 2.1% since 2011.

Rising costs
Poor sales have been exasperated by rising costs. Payroll and SG&A increased 6.7% and 9.2%. Advertising expenses are partly responsible for SG&A, as it increased from $527 million to $588 million in the past fiscal year. Other ship operating expenses, accounting for 17% of sales, increased 15.9% since last year.The majority of other operating expenses come from repairs and maintenance expenses, which have increased from $832 million to $954 million in the past year. These cost are apart of Carnival's "capital program," which is focused on enhancing efficiency of the ships. The maintenance expenses will likely not increase much further in upcoming years, and will only rise as Carnival increases it's fleet. The positive side is that these expenditures will likely increase the time that ships are available for use. It may be helpful to understand how the current maintenance cost will affect depreciation in future years.


The compression of sales and increase in expenses is not a good sign. Foolish investors understand when operational expenses grow while the revenue is growing, but that is not the case. In fact, the company had abysmal operating income, decreasing 17% YOY, and 40% from 2011. The bottom line did not fare much better than operating income, as it decreased $220 million, or 17% YOY. Since 2011, net income decreased $834 million, or 43.6%. The disconcerting part about the bottom line decline is that the company pays virtually no income tax since it enjoys the Panama tax holiday. The table below describes the profitability ratios for Carnival.

Profitability ratios





Return on assets




Return on equity




Operating profit margin




Net profit margin




All of the ratios have shown sizable negative downtrends. The poor ratios are yet another signal of costs increasing faster than revenue. Comparing Carnival's 2013 results to Royal Caribbean (NYSE : RCL), the profitability ratios show similarity.

2013 Ratios

Royal Caribbean


Return on assets



Return on equity



Operating profit margin



Net profit margin



Carnival's net profit margin is about a percentage point higher, even though its operating profit margin is 2% less. These comparisons show that Carnival is not fully responsible for the poor results, since it's top competitor is also experiencing unsettled sea's. With that said, if revenue remains stagnant or decreases, it is imperative that Carnival cuts its operating expenses.

Foolish Conclusion

Carnival's profitability downtrend illuminates problems that the Foolish investor cannot ignore. If the company is unable to spur revenue growth, it will have to cut costs to provide investors with a reasonable return on equity. Continuation of recent results will force investors to jump ship.

Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2880897, ~/Articles/ArticleHandler.aspx, 9/5/2015 10:25:09 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

christian sgrignoli

Christian Sgrignoli is the President of CT Financial LLC. The firm was created in 2012 as a consulting business via state legislative enactments. It currently operates as an investment management and research company.

Today's Market

updated 13 hours ago Sponsored by:
DOW 16,102.38 -272.38 -1.66%
S&P 500 1,921.22 -29.91 -1.53%
NASD 4,683.92 -49.58 -1.05%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 4:02 PM
CCL $48.93 Down -0.47 -0.95%
Carnival Corp CAPS Rating: ***
RCL $88.54 Down -0.75 -0.84%
Royal Caribbean CAPS Rating: ***