Shares in focus: A holiday giant

The outlook is murky for cruise line operator Carnival, says David Stevenson.

What is Carnival?

One of the largest global leisure travel groups, with 8.5 million customers a year. Brands include Holland America, Princess Cruises and Seabourn in North America, P&O Cruises and Cunard in the UK, AIDA in Germany, Costa Cruises in southern Europe, and P&O Cruises in Australia. In total, the firm operates 23 ‘fun ships’ on voyages that range between three and 16 days to various far-flung destinations. Carnival is the only stock listed in both the S&P 500 and the FTSE 100.

What’s its history?

Started by the late Ted Arison, a cruise industry pioneer, the company launched in 1972 with a single secondhand ship (the Mardi Gras) and just enough fuel to make a one-way trip from Miami to San Juan. The firm needed major bankrolling by Arison to keep going. But in 1987, 20% of its shares were sold publicly, providing the capital for acquisition-led growth. The Carnival name was adopted in 1994 and, in 1998, Cunard built the world’s largest ocean liner, the 150,000-ton Queen Mary II. In April 2003 Carnival merged with rival P&O Princess Cruises.

Who runs Carnival?

Chief executive and chairman is Micky Arison, son of the founder. He also owns the basketball team Miami Heat. Last year he was ranked the richest man in Florida by Forbes, and no. 69 in the whole of the US, with an estimated wealth of $4.1bn. He was paid more than $7m by Carnival in 2009, including a $2.2m cash bonus. Chief operating officer is Howard S Frank, a Carnival veteran since 1989. Head bean counter is ex-Royal Caribbean Cruises staffer David Bernstein.

How’s trading?

So-so. Second-quarter revenues measured in US dollars (the firm’s accounting currency) were slightly up, despite being hit by events in the Middle East, as well as Japan’s earthquake and nuclear disaster. But this rise was “more than offset by higher fuel prices”, which cost the company some $150m.

And the outlook?

Mixed. There are fewer advance bookings for the rest of 2011 compared with last year, but customers are paying more. “Our North America brands continue to perform well, benefiting from the gradual economic recovery,” says Arison. But the company expects “lower yields for our Europe, Australia and Asia segment in the second half”. Fully diluted earnings per share are seen coming in at $2.40 to $2.50, compared to $2.47 in 2010.

The analysts

Of the 18 analysts surveyed by Bloomberg, two-thirds are bulls; 17% rate the stock a ‘hold’; 17% are sellers. The average price target is 2,833p, 18% above the current level. Keenest is Wyn Ellis of Numis Securities with a 3,500p target. There are no recent ‘sell’ calls: the most recent advice to avoid the stock came in March from Greg Johnson of Shore Capital.

Our view

Carnival is very dependent on consumer spending, which could stay weak, while oil prices are an added uncertainty. On a p/e of well over 15, this stock looks more than fully priced.

The numbers

Stock market code: CCL
Share price: 2,412p ($38)
Market cap: £20bn
Net assets (published end-May 2011): £14.5bn
Net debt (published end-May 2011): £5.6bn
P/E (current year estimate): 15.3
Yield (prospective): 2.4%
Geographic shareholdings: UK 2%, US 55%,
privately held 38%

Directors’ dealings

Carnival’s top dogs haven’t exactly been too keen on their own company’s equity over the last year.

Whenever directors have taken up their share options, they’ve sold an equivalent amount of stock in the open market. In fact, there’s been just one ‘net’ acquisition of shares – a total of just 627 were bought last October.

Meanwhile, there have been two hefty sales by directors, as shown below. You can see the timing of these deals in the chart above.

Director and total shares sold:

Robert Dickinson: 40,000
Howard Frank: 120,000

Category: Economics