Monday, May 14, 2018

A current AIM Program Small Cap Equity Holding: Carnival plc ADR (CUK) by: Andrea Blomquist. "All Aboard for Carnival plc"

Carnival plc ADR (CUK, $64.65): “All Aboard for Carnival plc”

By: Andrea Blomquist, AIM student at Marquette University
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.


Carnival plc ADR (NYSE: CUK) is the largest global cruise company operating through 10 different global brands. CUK’s business segments include North America and Europe, Australia, and Asia.

• In FY17 CUK paid out over $1 billion in quarterly dividends, increasing their dividend twice throughout the year.   

• CUK capitalized on consumer’s change in preferences to experiences over goods, increasing revenue by 6.8% in FY17, the biggest revenue growth since FY11.

• Using unique public relations measures like TV broadcasting featuring Carnival ships, CUK intends to drive revenues even further after strong Q1FY18 numbers reported from these new tactics.

  Carnival improved ROIC numbers to 9.4% in FY17 and continue along the path to attaining double-digit ROIC in the coming years. 

Key points:

One of CUK’s most consistent measures has been their promise of returning excess cash to shareholders.  In FY17, CUK paid out dividend per share of $1.60, a nearly 20% increase in annual dividend from FY16.  Additionally, CUK committed $600 million to repurchase shares, to bring total invested to share repurchase to more than $3 billion. 

Operating in a cyclical industry, it’s no doubt CUK has seen it’s share of revenue volatility.  In the years since FY10, revenues have grown anywhere from 9% to -2%, leaving investors uncertain about what the future holds.  With excess volatility hopefully in the rear-view mirror, CUK has seen a steady increase in revenue over the past two years.  Facing significant headwinds from natural disasters as well as fuel and currency, diluted EPS dropped slightly in FY17.  Investors didn’t seem to worry as CUK remains operationally stable.

In hopes to increase word of mouth traffic, Carnival employed several unique PR efforts in FY17.  Carnival partnered with Univision to develop Ocean streaming and viewing programs through broadcasted platforms, as well as developing social media games to promote interest surrounding an Oceanic experience.  Other PR efforts included premiering The Greatest Showman aboard a Cunard ship.  Other efforts involve global celebrities to further develop their brand. 

Carnival’s focus to invest in value-adding projects as well as return excess cash to shareholders certainly paid off in Fy17.  Improving from last year to 9.4%, its clear that the PR initiatives described above as well as focus on creating excess demand above capacity has been working.  CUK has set their sights on double-digit ROIC for FY18, and as these marketing plans continue to play out, I don’t see why this wouldn’t be reached. 

What has the stock done lately?

Starting FY18 at a price of $66.96, CUK is currently trading at $64.65.  Other than jumping about 7% to $71.67, the highest of the year, CUK has remained relatively stagnant in the past four months since the beginning of FY18.  The pop came after reporting strong annual numbers for FY17. Carnival has stayed in the $63- $66 range for the better part of the year thus far, but as the economy presses on further into the recovery phase, if CUK can continue to report strong quarterly earnings, I see positive growth for the stock coming. 

Past Year Performance: CUK’s stock performance over the past year hasn’t been much different than that of the past few months.  The stock had two big jumps in the last 12 months, following the ends of Q3 and Q4 of FY17, but outside those, the stock price has floated around $65 for the remainder of the year.  The stagnant price movements in FY17 and into 18 make sense, as CUK was coming off significant EPS growth (FY16) of more than 60%. 

Source: FactSet

My Takeaway

While the past year has been relatively stagnant despite good earnings, ROIC, and revenue growth, I see momentum building following another strong reported quarter.  The AIM International Equity Fund has held CUK since December 2015, and the stock has increased 23% within that holding period.  In combination with their revenue turnaround and creative marketing efforts, CUK will return to a period of growth again.  If they can manage to maintain revenue growth around a 5% CAGR in the coming years, the continued buzz and tailwinds from CUK’s creative public relations efforts will be the catalyst to push the stock into a higher trading range. 

Source: FactSet