All at sea
There are plenty of high-flying stocks on the FTSE 100 following the recent bull run, but cruise ship operator Carnival isn't one of them. Its share price has foundered, falling 15% over the past three years, against a 10% rise on the FTSE 100 as a whole. Does that make now a buying opportunity?
Like rats leaving a sinking ship, investors have abandoned Carnival in packs. Who doesn't remember the Costa Concordia disaster, which killed 32 people in Jan. 2012? That was swiftly followed by a blaze on board sister liner Costa Allegra, which knocked out the power supply. Companies take time to recover from that kind of brand damage (just ask BP). Worse, the mishaps have continued this year -- with three cruise liners all suffering technical problems, knocking another 10% off its share price in two months. Reputational ruin isn't the only threat -- compensation has to be paid to disgruntled passengers, while future customers will be scared away. No wonder bookings are down in 2013.
Cruising for a bruising
Another concern is that Carnival still generates roughly 40% of its income from stricken Europe. That said, group revenue for the first quarter held up well, and recent sharp falls in the price of oil should provide further ballast. Management expects to generate $3 billion of cash this year, and plans to return some to its long-suffering shareholders. Like many FTSE 100 companies, it is also setting a course for emerging markets, launching new liners targeting the Chinese and Japanese cruise markets (next stop, Singapore). Carnival is planning to continue increasing its capacity by launching two to three ships every year to steadily boost its capacity.
Carnival is the dominant player in the cruise industry, with a global fleet of more than 100 ships that should carry around 10 million passengers in 2013. I still worry about the longer-term impact of Costa Concordia, which is the sort of thing people remember when choosing their cruise, and means that any future mishaps will be closely scrutinized (again, ask BP). An Italian court has just opened a series of hearings to decide who should bear the blame for the disaster. Some survivors have already accepted modest payouts, while others are seeking huge sums in compensation. It will no doubt drag on and on, keeping Carnival in the headlines for the wrong reasons.
So does this make now a buying opportunity? Possibly. They say bad news comes in threes. Surely a fourth Carnival ship can't develop a technical fault this year? Investec has maintained its "buy" recommendation, although it reduced its target price from 30 pounds to 28 pounds. Numis has cut its target from 30 pounds to 27.50 pounds, downgrading it to "add." Both are comfortably above its current price of 22.65 pounds. Carnival's 2.9% dividend sits just below the FTSE 100 average, but it is covered 1.9 times, and management's progressive dividend policy (it was recently hiked 20%) should see further rapid improvements.
I'm surprised to see Carnival trading at 18.4 times earnings, I would have expected a cheaper valuation, given past problems. The company looks prone to accidents, but that can't last forever. If it breaks the Chinese cruise market, its share price could happily sail into the sunset, but I remain a little wary.
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