Cruising For a Bruising

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Did you hear? Carnival Corp. (NYSE: CCL) is reversing its commercial. You know the one where the couple sits on the deck of a Carnival Cruise ship appearing rested and relaxed as they look back on an earlier wilderness trip that left them stranded in their car while a hungry bear claws at the windows. The new version’s subliminal message is that people would really rather be stuck with the bear than on one of Carnival’s cruise ships.

That is just one of a plethora of jokes making the rounds after thousands of passengers spent five miserable days drifting at sea stuck on a smelly Carnival Cruise ship in the Gulf of Mexico after a fire in the engine room crippled the ship. Passengers had to deal with overflowing toilets and drainpipes, a gut-wrenching stench, no air conditioning, and meals of cold cucumber and cheese sandwiches.

The 893-foot ship, christened the Triumph, turned out to be anything but for Carnival and came on the heels of another disaster for the company. Last year, Carnival’s Costa Concordia luxury liner ran aground off the coast of Italy. The crash was devastating and left 32 dead.

Carnival Cruise Lines Chief Executive Gerry Cahill has repeatedly apologized to passengers of the Triumph and offered compensation to the 3,143 passengers. The world’s largest cruise company said passengers will be reimbursed in full, including transportation expenses. They will also receive a future cruise credit equal to the amount paid for the Triumph cruise, plus $500 as compensation for the ominous ordeal.

Many passengers balked at the mere thought of another cruise aboard a Carnival ship. Those brave souls that may mull the offer won’t have to worry about boarding the Triumph--the company has axed 14 upcoming voyages on the ship.

While Carnival passengers will be compensated for the debacle, shareholders shouldn’t look for any kind of reward from Carnival’s stock. The Triumph mishap will unquestionably cost Carnival considerably. The company already warned that losses related to the Triumph mess could shave CCL’s second half per share earnings by as much as a dime.

Bearish traders came out of hibernation in droves in the wake of the Triumph chaos, flooding options markets with put activity. But even before the latest Carnival Cruise commotion, bearish option trading in CCL was brisk and bearish.

Though many passengers may move quickly and eagerly to do the American thing and race to sue (as some have), legal analysts say they are in for a rocky passage if they attempt to go that route. The cruise industry has a legal structure in place that guards against big-money and tort lawsuits. But the fresh fiasco is another hole in Carnival’s wounded side.

CEO Micky Arison, notably absent in Italy in January 2012 to oversee the Costa Concordia crisis (which has resulted in a myriad of lawsuits), has not yet publicly addressed the Triumph calamity. He certainly isn’t acting like a captain committed to his ship—even if it means going down with a sinking ship.

The public crowd that still clamors for a cruise vacation is undeniably apt to look at other cruise lines in the near future. Among options are Norwegian Cruise Lines Holdings Ltd (NASDAQ: NCLH) and Royal Caribbean Cruises Ltd (NYSE: RCL).

But investors should be wary of dipping their toes into Royal Caribbean. Shares carry a very lofty and sea sickening P/E of 473.20. Net income is deteriorating, debt risk is growing and return on equity has been uninspiring. The company has warned that increased fuel and cruise costs, coupled with currency exchanges, will keep near term gains modest. Also to keep gains in check is the slight down-tick in cruise ship occupancy that the cruise line has been experiencing.

Norwegian Cruise Lines looks like a better bet for market participants. The company just reported its first earnings release since going public in January, and handily beat the consensus estimate of a penny, reporting earnings per share of 4 cents. Year-over-year, the company earned 97 cents per share, a 36% increase. It was the company's 18th consecutive quarter of year-over year growth. The company is focused on improving fuel usage, which accounts for a big chunk of its cash. It is also increasing its fleet, and says 2013 is a turning point for the company. Right now it appears Norwegian is steered in the right direction.

Meanwhile, Carnival is headed on a different path. Shares are certainly cruising for a bruising.


DianeAlter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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