Leisure Loser or Buying Opportunity?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Carnival Corporation (NYSE: CCL) is a stock that's been on my radar for quite a while. Originally I was attracted to the company because it was a well-known name brand, and as a direct play on the recovery of the overall economy. Since I started tracking the company however, there have been some well documented issues, but the company has re-instituted a dividend that it had to cut during the Great Recession. With a current dividend yield over 3% and given increased earnings guidance, it appears the Carnival Corporation could be a good buy at this time.
The current quarters earnings report saw revenue down 2.26%, net income at just $.20 per share, but diluted shares down 1.76%. The company saw a significant increase in fuel prices, which hurt overall results. However, North American brands performed well achieving a 3% revenue yield improvement compared to the prior year. While all of the international brands showed lower revenue yields, the company expects this to improve in future quarters. One big development is three new ships were delivered during the second quarter. According to the company, the ships, "feature a variety of unique and exciting innovations which generated strong consumer interest". Though this is positive news, when we look at the company's financial statements there're a few worrisome statistics.
Financials Versus Competitors:
Carnival's cash balances doubled from $450 million to $900 million in the last year. However, long-term debt increased by about $390 million, and shareholders equity decreased by about $800 million versus last year. Probably the most troubling statistic is, cash from operations was $1.136 billion versus capital expenditures of $1.73 billion. Even with negative free cash flow, the company paid $194 million in dividends. Two of carnivals primary competitors are, Royal Caribbean (NYSE: RCL) and Walt Disney (NYSE: DIS). When it comes to the company's balance sheet, Carnival is in a superior position to Royal Caribbean, but in a slightly weaker position than Walt Disney. With a debt-to-equity ratio of 0.36, Carnival clearly is less leveraged than Royal Caribbean with a debt-to-equity ratio of 0.92. However, Carnival can't quite match rival Walt Disney's debt-to-equity ratio of 0.33. So what should investors expect in the future?
Carnivals 2012 outlook indicates the company sees booking volumes continuing to improve, and running well ahead of last year, however at lower prices. CEO Micky Arison commented, "The increase in booking volumes indicates that a progressive recovery is well underway and we are catching up following the slowdown in bookings during wave season, our peak booking period." The company is forecasting not only third-quarter earnings that are slightly better than previously expected, but also full-year earnings better than they previously guided. For the fourth quarter, the company expects non-GAAP earnings in the range of $1.42 to $1.46. Considering estimates for the third quarter are $1.45, it's highly likely that the company will either miss or just barely meet estimates. Full-year estimates are a different story, as the company expects earnings in the range of $1.80 to $1.90, this compares favorably versus estimates of $1.83. Given that it sounds like Carnival will beat full-year estimates, could the stock be a good buy versus other options?
Which Is The Best Investment?
If you're looking for a pure play on the cruise line industry, Carnival could be a good bet. With Royal Caribbean expected to grow earnings at just 6.6%, versus Carnivals expected growth at 11.70%, clearly Carnival represents a better opportunity. However, the decision gets more difficult if you compare Carnival to Walt Disney. While the company's growth rate can't match Walt Disney's expected growth of 12.84%, Carnivals dividend yield is much higher. With a current yield at just over 3%, versus Walt Disney' yield at just 1.25%, income-seeking investors would be well advised to take a look at buying Carnival stock. The one thing that investors will need to keep an eye on is the company's free cash flow payout ratio. In the most recent quarter, the company paid out dividends that it did not have the money to cover. However, with next quarter being the busiest of the year, Carnival should reverse this trend. If on the other hand, investors are looking for a good long-term stock, Walt Disney seems attractive at these levels. At just less than 16 times forward earnings, and having beat earnings estimates four of the last four quarters, Disney has a lot of momentum heading into the second half of 2012. Use this information as a starting point for your own research and decide whether Carnival or Walt Disney deserve a spot in your portfolio.
MHenage 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.