Billionaire Arison Buys More of Carnival

By Meena Krishnamsetty - July 18, 2012 | Tickers: CCL, LVS, RCL, DIS | 0 Comments

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Micky Arison, billionaire CEO of Carnival (NYSE: CCL) and owner of the NBA champion Miami Heat, filed with the SEC to disclose that he owned 180 million shares of CCL, equal to 30.2% of the company’s shares outstanding.  The cruise ship owner and operator is flat year to date, but had a poor 2011 and has had to deal with bad publicity this year after the January 2012 grounding and loss of the Costa Concordia.  Arison likely believed that the share price had become disconnected enough from the company’s core business that it made a good buy.  Arison had previously owned 29.6% of the shares outstanding in summer 2011.

Carnival, which also owns other cruise line brands such as Costa Cruises and Cunard, is coming off a poor quarter in which its net income fell to $14 million from $206 million in the second quarter of their 2011 fiscal year (Carnival’s fiscal year ends in November; May 31 was the end of their second fiscal quarter).  However, most of this quarterly decline was due to losses on fuel derivatives as operating income only fell from $279 million to $253 million.  Looking at the first half of Carnival’s fiscal year, revenue has been stagnant and fuel costs have been up, resulting in lower operating income and a net loss of $125 million compared to earnings of $358 million in the first half of FY 2011.  While their North America segment managed to make about the same operating income as in 2011, the European segment experienced major losses.  This was partly due to a 6% decline in revenue (likely tied to poor economic conditions in Europe) and partly due to a large impairment charge that the company had booked in the first quarter of its fiscal year to goodwill in its Ibero Cruises brand.

Platinum Asset Management, under direction of Kerr Neilson, initiated a 3.9 million share position in CCL in the first three months of 2012.  The Australian fund acts as a global value investor and has a number of positions in large cap technology companies (see what Platinum owned at the end of March).  Barry Rosenstein’s Jana Partners is also an investor, entering into a position with Carnival between January and March and buying 1.2 million shares (here is the rest of Rosenstein's portfolio).

Carnival’s closest publicly traded peer is the significantly smaller Royal Caribbean Cruises (NYSE: RCL), whose market capitalization is $5.3 billion compared to CCL’s $25.3 billion.  This gap is partly driven by Royal Caribbean having a smaller business and partly driven by a much lower price-to-earnings ratio: Royal Caribbean has a trailing P/E of 9.2 while CCL’s is nearly twice that, at 17.8.  As with Carnival, RCL is slightly down year to date. Disney (NYSE: DIS) also operates a cruise line business, but it is only a small part of their company and much smaller than either Carnival’s or Royal Caribbean’s business.  In the sense that cruise ships serve as a “getaway” vacation, investors can also consider them against casino hotel companies such as Las Vegas Sands (NYSE: LVS).  LVS trades at a trailing P/E of 21 but is expected to achieve higher growth over the next few years with a PEG of 0.7.  Carnival and RCL both have PEG ratios of over 1.5.  This suggests that Wall Street analysts consider the cruise business to have fairly poor prospects, whether because it is becoming less trendy or because of recent events such as the Costa Concordia and the occasional rounds of food poisoning that have hit various cruise ships.  CCL pays a dividend yield of just above 3%, which may attract some interest, but in general an investment in Carnival seems to be primarily a bet on the rebirth of a disfavored industry.

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