Friday, January 1, 2016

17th AIM student update by Clare McNamara. Carnival Plc (ticker: CUK): Catching Some New Waves!


 CUK (Carnival Plc.): Cruising for Alpha!
By: Clare McNamara, Student at Marquette University

 Image result for carnival logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• Carnival offers cruises (under the names Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn, AIDA Cruises, Costa Cruises, and Cunard) in the US, Europe, Australia, and Asia. It operates 100 cruise ships and is doubling its lines in China. 

 


• The new, diverse management team is gaining experience and seeks to reach broader audiences for cruising - and the timing could be just right for the major expansion in China!

• Carnival’s setting sail on some new seas with its “social impact travel” and access to Cuba.

• Low oil has been good for the consumer and travel industry, but Carnival can’t count on it to boost earnings for too long.

Carnival Plc. (NYSE:CUK) is set to take even more market share within the cruise industry. The cruise industry in China is still in its infancy and has a lot of room to grow, with the middle class still growing at an astounding rate. Other cruise lines like Royal Caribbean have caught wind of the untapped Chinese market and began to invest in it through new marketing campaigns and entertainment geared towards the Asian market. However, Carnival will be adding four new ships from the more iconic Carnival and Aida lines by 2017, to its already existing Princess and Costa cruises stationed at Chinese ports. They will have the most ships out of an cruise line in China by that time, maintaining their 42% market share within the cruise industry.

In an interview earlier this year, CEO Arnold Donald made a pretty big bet on China, saying Carnival is situating itself “to take full advantage of what one day will be the world's largest cruise market”. It is this type of forward, strategic thinking by a fairly new CEO that grew the cruise line’s stock 50% within the first year of his presidency. Donald and his team of Senior VP’s are taking on new initiatives, like the music concert series and penthouse spa suites, to make each of its brands even more unique and appeal to broader audiences.

Carnival will be adding a 10th line to it’s fleet with the first ever Fathom cruise setting sail in spring of 2016. “Social impact travel” is a completely new concept for the cruise industry and much of the travel industry in general, and Carnival is leading the way. This is attracting a completely new type of cruiser with the unique opportunity to volunteer while vacationing. The ship will also alternate with some weeks going to Cuba, which will most likely drive sales in the Caribbean in the coming years.

Oil will be an issue for Carnival and the rest of the industry coming up, as it has been wind in their sails for the past year. Although Carnival has reduced emissions, oil is still their most used source of energy for their ships. It’s important to keep an eye on oil prices, because a huge rebound in prices could seriously impact Carnival’s margins.

What has the stock done lately?

CUK's stock chart looks impressive as it is up roughly 20% year to date. That may sound like a lot, but remember how much of a tailwind they have had from lower energy costs. This has allowed them the ability to beat earnings for three straight quarters this year. Despite this, the stock has been stagnant for the past 3 months, still recovering from the dramatic news about China’s slowing economy in the late summer. The new ships that are about to be launched in 2016 could bring some new life to CUK. This, along with the improving fundamentals of the company could be just the catalyst it needs.

Past Year Performance: CUK has increased over 15% in value over the past year, but the stock still has value and room to grow. Beating earnings guidance within the past year display’s managements priorities to give back to shareholders, with a dividend yield of 2.24% - also rose in 2015. The firm is about half as levered (37x D/E) as it’s peers (average 129x D/E), and has a mid-range P/E. The street confirms these numbers as well, with 3 out of 5 top shareholders increasing holdings recently.



Source: FactSet

 My Takeaway
Carnival had some rough seas over the past year with the sell off of stocks in China, but it still continued to surpass earnings estimates. The strong leadership within the company is really going to drive the ship forward in 2016 as the innovative cruise line charts new waters. While oil is something to be conscious of, it shouldn’t be a make-it or break-it for Carnival; they have lived through high oil before and can do it again. Watch out for this creative, ever-spinning firm to offer new ideas for travel. This company is an industry leaders and could once again be a surprise performer in 2016.


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