Should We Cruise on Carnival?

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

Carnival (NYSE: CCL) dropped nearly 2% on March 15 due to its disappointing 2013 outlook. The company expects to earn around $1.80 to $2.10 per share for the year, while analysts expected EPS to be around $2.35. Since the beginning of February, the stock has declined by around 12%, from around $39 per share to nearly $35 per share. Should we avoid Carnival due to its poor outlook? Let’s find out.

Fluctuating bottom line and free cash flow

Carnival, incorporated in 1972 in Panama, is considered to be the biggest cruise company globally, with around 100 cruise ships and a portfolio of many world famous cruise brands. The majority of its cruise, around 33% of the total passenger capacity deployed, were in the Caribbean. The European region ranked second, accounting for 31% of the total passenger capacity in 2013.

In the past ten years, Carnival’s revenue has been on the rise, from $6.7 billion in 2003 to $15.4 billion in 2012. However, net income has fluctuated in the range of $1.19 billion - $2.4 billion during the same period. In 2003, it earned $1.66 per share, while the EPS was only $1.67 in 2012. Indeed, over the years, Carnival’s net margin has experienced a decline, from 17.77% in 2003 to only 8.44% in 2012.

In 2012, Carnival generated around $3 billion in operating cash flow and $667 million in free cash flow. What I like about Carnival is that the company does not employ a lot of debt in its operation. As of February 2013, it had $23.5 billion in total stockholders’ equity, $476 million in cash, and nearly $9.4 billion in short and long-term debt.

A decent first quarter

In the first quarter of 2013, Carnival reported that its GAAP net income was $37 million, or $0.05 per share. This included the net unrealized losses of $28 million on fuel derivatives. This quarter was an improvement compared to the loss of $139 million in the first quarter last year. A $139 million loss last year was due to a $173 million impairment charge on Ibero goodwill and trademark.

For the full year 2013, Carnival’s Chairman and CEO, Micky Arison, expected that its full year 2013 non-GAAP diluted EPS to be in the range of $1.80 - $2.10, compared to $1.88 per share in 2012. In addition, he estimated that Carnival would generate more than $3 billion in operating cash, and be committed to returning free cash flow to shareholders in 2013.

Highest dividend yield with reasonable valuation

At around $34 per share, Carnival is worth around $26 billion on the market. The market values Carnival at around 10.5 times EV/EBITDA. Compared to its peers, including Royal Caribbean Cruises (NYSE: RCL) and NCL (NASDAQ: NCLH), Carnival seems to be the best pick among the three.

NCL is trading at nearly $30 per share, with a total market cap of around $6.2 billion. It has the most expensive valuation at 15.7 times EV/EBITDA. Royal Caribbean, at nearly $33 per share, has around $7.1 billion in total market cap. It is valued at around 10.36 times EV/EBITDA.

Among the three, NCL is the most profitable company with an operating margin of 15.7%. The operating margin of Carnival ranked second at 12.1%, while Royal Caribbean’s operating margin was the lowest at 10.26%. Income investors might like Carnival the best with its highest dividend yield of 2.9%, while the dividend yield of Royal Caribbean is only 1.4%. NCL does not pay any dividends at the moment.

My Foolish take

Among the three, I would definitely go for Carnival for its highest dividend yield, reasonable valuation, and decent operating margin. However, the cruise business is not a good business to hold in a long run, as it would keep experiencing a fluctuating free cash flow in the future due to a high annual maintenance capital expenditure.


Anh HOANG 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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