Should You Buy Carnival Today?

LONDON -- Shares of cruise ship operator Carnival  (LSE: CCL  ) (NYSE: CUK  ) have endured a torrid time in recent weeks, slipping 15% from mid-February's near-two-year high of 2,628 pence to current levels. The company has continued to endure tough press headlines following the Costa Concordia disaster in Jan. 2012, with an engine room fire and subsequent marooning of passengers on its Carnival Triumph ship in February once again denting investor interest in the company.

However, I view recent weakness as an excellent buying opportunity. Indeed, Liberum Capital has placed a 3,000 pence price target on the stock, illustrating the stock's excellent upside potential.

Carnival sails back into profit
Carnival announced in last month's first-quarter update that it swung into a net profit of $37 million from a net loss of $139 million during the corresponding period in 2012. However, the results were overshadowed by news of further mechanical failures at two of its other liners, raising fresh fears over hefty repair bills and effect on customer demand.

The firm advised that, although cumulative advance bookings for this year are behind those of the same point in 2012, bookings have picked up in recent weeks, helped by attractive price promotions. And over the long term, I expect Carnival to successfully negotiate its current travails and boost passenger numbers -- Investec has penciled in a compound annual capacity growth rate of 3.7% through to 2016.

In particular, Carnival looks set to make further headway into promising emerging markets, especially in Southeast Asia, and the company announced yesterday that its Sapphire Princess ship will be based in Singapore from the end of 2014. The firm told AFP that it expects cruise liner passengers in Asia to rise from around 1 million currently to 7 million by the end of the decade.

Double-digit earnings growth anchors investment case
City forecasters expect earnings per share to bounce back in the year ending Nov. 2013 after last year's disastrous 23% drop to 118 pence. Growth of 14% is expected this year, to 134 pence, before steaming 22% higher in 2014 to 164 pence.

The holiday specialists currently change hands on a P/E ratio of 16.6 and 13.6 for this year and next, providing a discount to a forward earnings multiple of 17.6 for the broader travel and leisure sector.

Despite Carnival's earnings pressure in 2012, the company still hiked its dividend 21% to 63.5 pence per share, and broker estimates expect this to continue rising in the medium term. Payouts of 73.3 pence and 82.8 pence are penciled in for 2013 and 2014, correspondingly, up 15% and 13% on an annual basis and providing yields of 3.3% and 3.7%.

Not only are dividends set to shoot above the 3.2% average yield for the FTSE 100, but this exciting dividend growth is also expected to remain well protected, with coverage of 1.8 times and two times for this year and next around the widely regarded security threshold of two times.

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