By:
Clare McNamara, 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.
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
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.
