Cruising for Profits
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cruise companies are always raising the bar to attract customers with attractions like kid-free sanctuaries, cupcake venues (isn’t this cupcake craze over yet?), real grass lawns, rope courses, Starbucks, Coney Island style boardwalks, and even a Central Park hub. But is it enough to attract cruisers and offset lingering memories of a tragedy and higher costs?
Carnival Corporation (NYSE: CCL) owns Carnival Cruise Lines, Holland America Line, Princess Cruises, and Seabourn in North America; and AIDA Cruises, Cunard, Ibero Cruises, P&O Cruises, and Costa Cruises in Europe, Asia, and Australia for a total of 101 ships.
It was a Costas Cruises ship, the Concordia, which ran aground on January 13th leaving 32 dead. Criminal charges have since been filed against several of the ship officers and the captain. Lawsuits have been filed by the passengers’ families and Italian businesses that were affected by the disaster. Jurisdiction for these suits is now being litigated as to whether Italy or the US is the proper venue. Even once that is decided the suits; seeking millions in damages, will likely take years. One family of a Hungarian victim is seeking $400 million alone.
When the news broke the stock fell from $35.00 to under $30 on 10 times average volume. Carnival’s stock has gradually climbed back to a 52 week high. It’s still a far cry from its 2005 high just below $60.00.
As part of the Resorts and Casinos Industry it most directly competes with Royal Caribbean Cruises (NYSE: RCL) and to a much lesser extent with Walt Disney (NYSE: DIS) which operates a fraction of the cruise ships that the others do.
Carnival is the big name with nearly 49% of the world’s cruises. It has a P/E of 20.24 and a yield of 2.70%.
Royal Caribbean has a P/E of 13.58 and a smaller yield of 1.30% but just on September 13th they raised the yield by 20%. Royal Caribbean operates Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruisers, and CDF Croisieres de France.
Royal Caribbean’s Q2 report was disappointing with a net loss of $0.02 per share compared to a profit of $.43 for the same quarter in 2011. They also cut forward guidance from $1.80-$2.10 to $1.70-$1.80. Reasons cited were the overhang from the Costa Concordia tragedy and declining numbers of European cruisers. There was a bright spot noted that they have been paying down their debt, bringing it down by $800 million a year.
The entire cruise ship industry has put in place new safety regulations including a mandatory ‘muster drill’ before boarding. Even with gradually increasing cruise customers’ confidence the costs of food are escalating (remember all those buffets) due to the drought. Currency exchange rates work against them as well. The price of oil is always a concern.
Luring Europeans to cruise has been especially difficult this last year as their economic crisis continues. I don’t know what the term ‘staycation’ is called in French, Spanish, Italian or German but Europeans are doing it.
Analysts are somewhat bullish on Carnival expecting a 35.33% rise in EPS over one year. Carnival CEO Micky Arison owns 180 million shares and stated publicly the selloff was overdone. Royal Caribbean CEO Richard Fain owns 1,242,118 shares of his company.
Carnival was in the mainstream headlines again with its $50 per day ‘All You Can Drink’ initiative. There are several restrictions including that it only applies to drinks $10.00 and under and all cabin members over 21 sharing the same cabin must purchase the plan. No sneaking sips allowed. Reactions have been ‘mixed’ (pun intended) like those www.cruisecritic.com; readers that range from believing it will only promote more annoying drunken behavior to why didn’t they do this before to what a sheer waste of money.
Can They Right the Ships?
Carnival is reporting on September 17th and Royal Caribbean on October 22nd. Recent deals on travel web sites have offered substantial discounts and upgrades on cruises from these companies. It’s hard to tell if these are loss leaders or not.
This is a struggling industry still reeling from the terrible effects of a major tragedy, commodity costs and European financial distress. Even before the Costa Concordia they were plagued with occasional food poisoning outbreaks and crimes against passengers in port.
Bright spots on the horizon would seem to be a decline in the short interest of the float for both, that Royal Caribbean dividend raise and some CEO and analyst confidence.
If I had to choose Carnival has a significantly smaller debt burden than Royal Caribbean but years of litigation loom ahead for Carnival. As for Royal Caribbean, it just raised the dividend and has a lower P/E. But why buy these cruise ship stocks at all? If you really want some exposure to the Leisure sector why not just buy Disney, even at a multi-year high? It has almost the same size yield as Royal Caribbean, its cruise ships are only a tiny fraction of its business and it has all the broadcast and licensing and movies. You know it owns ESPN and they are ready for some football. The CFO did announce on September 13th that ad revenues were down and yet the stock still stayed up.
Disney has a smaller percentage of debt than both even though Disney released the news on September 13th that they will have to write down $50 million on a film under production they had to cancel. It has a P/E of 17.38 right in the middle of the other two cruise stocks.
As for the other two I think I would just as soon stay on shore and see how they navigate earnings season. Bon Voyage!
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney. 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.If you have questions about this post or the Fool’s blog network, click here for information.
