Should I Buy Carnival plc?

CarnivalI’m shopping for shares again, and there are plenty of goodies for sale. Should I chart a course for Carnival (LSE: CCL) (NYSE: CUK.US)?

Carnival Time

It is almost a year since I asked whether Carnival floated my boat. At the time, I was surprised at its expensive valuation. It still traded at 18.4 times earnings, despite its accident-prone recent history, which wasn’t just limited to the notorious Costa Concordia disaster. A string of cruise ships had suffered technical problems, forcing the company to shell out compensation to disgruntled passengers.

I was more impressed by Carnival’s attempts to crack the potentially massive Chinese cruise market. That looked like a wise move, especially since the company still generates 40% of its income from stricken Europe. On reflection, however, I decided to leave my portfolio moored on dry land. And I haven’t missed much. The share price is down 4% over the past 12 months, lagging the FTSE 100 index, which grew 2% in that time.

Cruising Or Bruising?

Yet the last three months had brought back some of the party spirit, with the share price up 12% after the group reported “accelerated progress in Carnival Cruise Lines’ brand recovery”. Q4’s year-on-year decline of 2.1% in net revenue yields was better than expected, management had predicted 3% to 4% in September. Anticipated bookings and net revenue yields were down for 2014, but again, were better than expected.

Better still, the company still generated an impressive $3 billion of cash, despite its challenging year. And with more than 100 ships, and 10 million customers, scale is on its side. That should help it crack new markets. Management is confident that both demand and revenues will increase, and that seems a reasonable assumption, as the Costa Concordia slowly fades from public memory. After all, ships do sink, just as planes do crash. But these days it doesn’t happen very often, and most people accept that.

Shale And Hearty

Several other factors may be moving in Carnival’s favour. Oil prices are lower, and the US shale story, as well as growing Iraqi and Iranian production, could hold them lower. Cruise ship holidays seem to be swinging back into fashion, at least among my friends, and that’s not just a sign I am getting older. Last year a record 1.79 million British holidaymakers took an ocean cruise, up 5% on 2012. That trend has been partly fuelled by cost-cutting, but prices are expected to start rising again. Although an emerging markets crisis could slow expansion plans in Asia.

At 25 times earnings, Carnival is a little pricey for my tastes. But the company has floated off the reefs, and with a fair wind, the share price could sail on. It has a lot of catching up to do.

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Harvey doesn't own shares in any company mentioned in this article