10-year

10-Year Anniversary Promotion (20% off)

Join GuruFocus Premium Membership Now for Only $279/Year

Once a decade discount

Save up to $500 on Global Membership.

Don't Miss It !

Free 7-day Trial
All Articles and Columns »

Carnival Is a Sinking Stock

February 23, 2012 | About:
Carnival (CCL) shares, already under a cloud because of the Concordia shipwreck last month, are likely to come under further pressure over the next few months.

Tourists, particularly ocean-going ones, get a little nervous when far away from home. When that distance from home might be across hundreds of miles of salt water, anxiety increases. It increases even more when a supposedly experienced captain has just crashed one of its owner’s ships, and then jumped aboard a lifeboat ahead of the passengers he is meant to be caring for. (Allegedly.)

U.S. lawyer John Eaves will be filing lawsuits against Carnival this month, and expects the company to pay out multi-millions of dollars. Costa cruises, the Italian owner of the Concordia, has offered what Eaves calls a "disrespectful" $14,600 to each of the surviving injured passengers.

He believes that it is the parent company’s responsibility to ensure that the safety and comfort of passengers aboard its ships is paramount in the thoughts of the operator and crew. Eaves also believes that the value of a neglect of this duty of care should be placed at $3 million per life lost, and no less than $100,000 per survivor. With 15 dead, 17 missing presumed dead, and a further 3,000 injured survivors, the lawsuit has a potential cost of somewhere in the region of $400 million or more should a court find in favor of the plaintiffs. This cost may be met by insurers but even if it is, expect insurance premiums to skyrocket.

But this isn’t the end of the bad news, for a successful lawsuit will have ongoing repercussions for the whole cruise ship industry and particularly for Carnival. A successful lawsuit will probably necessitate a change of culture within the industry. There will be stricter rules and regulations, better and more vigorous checks of equipment pre and post-departure required, and a greater emphasis will be placed upon technology and training. Every single item will be an extra cost burden upon operators and owners.

In the weeks following the sinking, Carnival reported that its bookings had dropped by a percentage somewhere in the "mid-teens" when compared to the same period last year. Certainly, I was considering taking a small cruise this year, but my wife will now no longer entertain such a notion. I don’t expect she ever will now. I also doubt that she is the only prospective cruise passenger to feel this way. Perhaps a little overboard as a reaction, but an understandable human one nonetheless.

As if this wasn’t bad enough, it has been reported that one of Carnival’s ships, the The Ruby Princess, cruising around the Caribbean was struck down with a gastrointestinal virus in the first week of February. Fancy being on a shipwreck and needing to swim for your life while battling against diarrhea and vomiting? No, me neither.

All in all, it has not been a sea-worthy start to 2012 for Carnival, though the company has said that it expects its 2012 profits to suffer in the region of $155 million to $175 million and no long-lasting effects from the incident. Tell that to my wife, and thousands of others that will be reminded of the incident every time the lawsuit is reported as it rumbles along. Shares seem to be trying to consolidate at current levels around $31. The share price, just like the tide, will ebb and flow: Don’t let your investment do the same. I rate this stock a sell right now.

About the author:

Vatalyst.com
Vatalyst articles are written by a team of independent traders from around the world. All of our articles provide actionable investing ideas you can use to make money.

Visit Vatalyst.com's Website


Rating: 3.4/5 (17 votes)

Comments

jeffdiver1
Jeffdiver1 - 2 years ago
It is particularly shameful how the capt. handled this and the fact that reams of disclosures and paperwork is needed prior to cruising limiting liability however planes were flown into the WTC, and planes crash, there were hijackings in the 70's with regularity. I don't see this industry going away. Yes it will be troubled but isn't this what value investing is about.
adamcz
Adamcz - 2 years ago
This sounds like the kind of story that precedes a great investment. I'll put this stock on my radar and see if it drops enough.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK