What are the long-term prospects for Carnival Plc (LON:CCL)?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.
I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!
I'm assessing every share on five different measures. Here's what I'm looking for in each company:
1. Financial strength: low levels of debt and other liabilities;
2. Profitability: consistent earnings and high profit margins;
3. Management: competent executives creating shareholder value;
4. Long-term prospects: a solid competitive position and respectable growth prospects, and;
5. Valuation: an under-rated share price.
A look at Carnival
Today I'm evaluating Carnival (LSE: CCL) (NYSE: CUK.US), is a global cruise and travel company, which currently trades at 2303p. Here are my thoughts:
1. Financial strength: Carnival has adequate liquidity to cover financial obligations, with net gearing of only 35% and an interest cover of five times. Although the net debt of £5.8bn is quite high at five times operating profits, cash flow is set to improve as the company intends to reduce shipbuilding with plans of introducing only two to three ships annually from 2013 to 2015 compared to a five-per-year average in the past.
2. Profitability: While revenue per share growth has been consistent increasing by 10% per year over the last 10 years, earnings per share have declined from a high of 197p in 2008 to 103p in 2012. Operating margin and return on equity (ROE) have also deteriorated from 20% in 2003 to 11% in 2012 and 12% in 2008 to 6% in 2012, respectively.
3. Management: Micky Arison is the CEO and chairman of Carnival Plc and Carnival Corporation. The son of the company's founder, Ted Arison, he has been Carnival Corporation's CEO since 1979 and Carnival Plc's CEO since 2003. He has over 30 years of experience in the industry and has built Carnival into the biggest cruise company in the world with a market capitalisation of £4bn and earnings of over £9bn to date. Management has committed to increasing shareholder returns and opportunistic share repurchases the next few years and has announced the renewal of its $1bn (£660m) share repurchase program.
4. Long-term prospects: Carnival is the largest cruise company in the world with 100 ships operating in the US, the UK, Canada and Continental Europe. It owns a portfolio of leading brands that include Carnival Cruise Lines and Princess Cruises in North America and P&O Cruises and Cunard Line in the UK.
The past couple of years have been a challenging time for the cruise industry: the global economic slowdown and volatile fuel prices have dampened demand and increased costs resulting in earnings per share declining in three out of the last four years. However, the company has responded by intensifying cost-efficiency efforts, reducing fuel consumption per unit by a cumulative 21% since 2007 and expects around another 5% reduction per unit in 2013. Also, with travel demand in Europe expected to be weak in the coming years, the group has focused on emerging cruise regions China and Japan.
5. Valuation: Shares are trading at a trailing price-to-earnings (P/E) ratio of 19, above its 10-year historical P/E of 17. Consensus earnings per share estimates are 134p for the year, giving it a forward P/E of 17. It also currently trades at a price-to-book ratio (P/B) of 1.1, below its 10-year historical P/B average of 2 and sports a current dividend yield of 3.8%, twice covered.
My verdict on Carnival
Despite Carnival's mediocre results the last few years, it remains the leading company in a largely underpenetrated industry; along with Royal Caribbean, they control 75% of the world's cruise capacity. The company's plans of a more "measured pace of newbuilds" in the coming years bodes well for shareholders by way of increased dividends and share buybacks. However, the continuing weakness of the global economy -- along with its relatively high debt -- is a cause for concern, while recent incidents with Costa Concordia and Triumph may still be fresh on people's minds, which could affect demand in the near term. The shares' valuations seem quite expensive considering all the risks mentioned.
So overall, I believe Carnival at 2303p looks like a hold.
More FTSE opportunities
Although I feel Carnival is a hold right now, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor". This exclusive report reveals the favourite income stocks owned by Neil Woodford -- the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.
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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Zarr does not own any share mentioned in this article.