Is This Company A Prime Destination for Investors?

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

The largest cruise company in the world, Carnival Corporation(NYSE: CCL), is trading 9.98% lower from where it started in 2013, a rarity in this bull market.  

The company operates about 100 cruise ships and tour companies in Alaska and Canada. Based on market capitalization, Carnival is valued at $26.73 billion, and the stock carries a price to book ratio of 1.13. Currently, the company carries a TTM profit margin of 9.58%. 

With Carnival trading at nearly half of its all time-highs, is the company a bargain in this inflated market, or should investors look for a different company to set sail on?  

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Strengths: 

  • Historic Revenue Growth:In 2003, Carnival reported revenue of $6.71 billion; in 2012, the company announced revenue of $15.38 billion, representing year over year annual growth of 9.65%, a strong trend that should continue into the future, with projections placing 2015 revenue at $18.35 billion. This growth has been a result of multiple mergers and a rapidly growing fleet.

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  • Institutional Vote of Confidence:79% of shares outstanding are held by institutional investors, representing over $17 billion in investment, displaying the confidence some of largest investors in the world have in the company and its future.

  • Leading Industry Position: Carnival is more than double the size of its biggest competitor, operates 100 ships with an estimated capacity of over 200,000 passengers, and employs 85,400 people.  With this leading market position and established nature comes a greater level of security and predictability for investors.

  • Reasonable Valuation: At the moment, the company carries a price to earnings ratio of 17.49, a price to book ratio of 1.13, and a price to sales ratio of 1.68; all of which indicate a company trading with fairly reasonable valuations.

  • Cash Flow Position:In 2012, Carnival generated $2.82 billion in cash flow, allowing the company to pay out its dividend yielding 3.02% 

Weaknesses: 

  • Net Debt: The company’s $465 million in cash and cash equivalents is outweighed by its $7.16 billion debt load, resulting in a net debt of $6.69 billion, accounting for 23.44% of market capitalization, a major financial weakness of the company.

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  • Margin Contraction: Over the past decade, Carnival’s TTM profit margin has gradually declined, representing a substantial weakening in the company's profitability.

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Opportunities: 

  • Dividend Growth: Since implementing their dividend program in 1988, Carnival has consistently raised their dividend payouts, and is widely anticipated to do so into the future.

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  • Expanding Fleet: From 2007 to 2011, the company expanded its ship fleet by 14, bringing their total to 99 ships.  Further fleet growth is widely anticipated and will present an opportunity for the company to grow revenue and fuel growth.

  • Acquiring New Customers: Carnival is consistently launching advertising campaigns in the hopes of acquiring new customers, and with an aging US population, demand for cruise ship vacations is expected to grow, presenting opportunity to the company.

Threats: 

  • Strength in Fuel Prices: A major expense of the company is fueling its massive fleet of cruise ships, and any strength in fuel prices could squeeze margins or potentially lead to lost customers if prices are raised.

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  • Public Relations Fallout: Carnival is no stranger to recent public relation blunders, from the Concordia disaster of 2012 to the recent ship engine fire, and the incredible quantity of media that surrounds these events could potentially lead to a public relations fallout, threatening its business.

Competitors: 

Major publicly traded competitors of Carnival include Norwegian Cruise Line Holdings Limited(NASDAQ: NCLH), Royal Caribbean Cruises Limited(NYSE: RCL), The Walt Disney Company(NYSE: DIS), and Comcast Corporation(NASDAQ: CMCSA) 

Norwegian is valued at $6.27 billion, does not pay out a dividend, and carries a price to earnings ratio of 70.87The company competes directly against Carnival, offering cruise experiences. Norwegian's business is not as financially strong as Carnival's, with a TTM profit margin of 3.01%.   

Royal Caribbean is valued at $7.68 billion, pays out a dividend yielding 1.37%, and carries a price to earnings ratio of 169.23Royal also competes in the cruise industry, but possesses an incredibly weak business model with a TTM profit margin of only 0.61%.  

Walt Disney is valued at $113.60 billion, pays out a dividend yielding 1.19%, and carries a price to earnings ratio of 19.16Walt Disney's business stretches across several industries and is extremely diversified, but the company most directly competes against Carnival through its theme park segment. Disney's business model is strong and thriving, with a TTM profit margin of 13.64%.    

Comcast is valued at $105.77 billion, pays out a dividend yielding 1.94%, and carries a price to earnings ratio of 16.92. Comcast's core business, much like Disney's, is diversified, but this media giant competes directly with Carnival through it theme park segment. With a TTM profit margin of 10.18%, the company's business is profitable 

The Foolish Bottom Line

Financially, Carnival is mildly strong. The company possesses stable revenue growth, a growing dividend, and a leading industry position. The major weaknesses of the company include its massive debt load and single digit profit margin, which has been in a state of downfall over the past decade. Looking forward, the company is likely to continue its trend of dividend growth and should repeat history and continue expanding its ship fleet. All in all, the recent pullback in Carnival may present a long-term buying opportunity to long-term investors, however until the cruise industry stabilizes and the company's profit margin displays signs of strength, investors should stay away from this volatile cruise-liner.  

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Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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