Travel and Leisure
Right now I think the above factors describe very well the ocean-going cruise industry. They are not yet screaming buys but if Carnival sees one more piece of bad news, the last hedge fund will bail, leaving the stock
short-term friendless. (The symbol is CCL and CUK, CUK being the old Pacific & Orient/Princess brand but really both share classes share the same management and the same share of profits.)
Pardoning the pun of CCL having a very big moat, it not only has a physical moat called the world’s oceans but is far and away the biggest of the cruise companies. While everyone is focused on the problems “Carnival” is having, few realize that CCL’s “other” company-owned brands include Costa, Princess, AIDA, Holland America, P&O, Ibero, Seabourn, and Cunard, each with their own subtly different marketing and demographic target audience. Between them these lines owned a 48% share of worldwide passengers in 2012.
Want to talk moats? Eat your heart out, Apple and McDonalds. The next biggest carrier is Royal Caribbean Cruises (RCL), which owns Royal Caribbean, Celebrity, Pullmantur, CDF and river cruise company Azamera, which enjoys a 23% market share. The rest of the cruise companies vie for the remains in a crowded field at the bottom — Norwegian Cruise Lines (NLCH) gets 7.6%, Disney (DIS) has a 2.5% share, Norway’s fabulous Hurtigruten (HRG.OL) 1.3%, and most of the rest all less than a singe percent.
In a nutshell, my case for CCL rests upon precisely the factors I discussed above. Their well-publicized problems of late have dropped the stock from $39 to $33, at which price it sells at a PE of 17 and pays a 2.9% yield. At this price, it sells at an eminently reasonable P/B ratio of 1.15 and a PEG ratio (Price/Earnings Growth) of 1.34.
Like all cruise lines, CCL carries a lot of debt; it isn’t cheap to build ocean-going palaces. In fact, it typically costs about a half-billion dollars per ship with a wait time of three years or so to get the job done, which is another reason why the moat around the biggest carrier seems pretty strong.
Plus, even with this high debt they get a lot of years’ revenue from each new build and the assets themselves have continuing value. They operate in what is currently a $36 billion dollar industry, but ask yourself this: with the Baby Boomer generation, the largest demographic segment in U.S. history, now retiring in huge numbers, what does the future look like for this business? More cruisers or fewer? Cruising takes chunks of wonderful time. Will today’s Boomers have more or less time when they retire?
Only in North America do we have a relatively mature and knowledgeable base of cruisers; last year three out of every 100 Americans took a cruise. In Europe, that was just one in 100. In the emerging markets, it is infinitesimal. So is cruising something for poor people or the middle class? Are the emerging markets descending into poverty or moving up in huge numbers into the middle class?
I’m not saying you need to go out and buy shares today. But we will be accumulating on any weakness. And there is one reason to buy right away — if you plan to take a cruise in the near future on any CCL or RCL line, they both give you a shipboard credit of $250 toward whatever discretionary items you choose to spend on if you are the owner of 100 shares or more.
If the current thinking in Washington prevails, the defense industry will be downsized precisely when officers will be RIF’d (a “Reduction in Force”) and many of the best NCOs will be encouraged to retire--all while the U.S. Department of Agriculture is spending millions of dollars to “market” food stamps to more middle-class Americans who only qualify because the threshold for applying has been liberalized.
All this and yet the big defense companies are all selling near their highs for the year. Does someone know something others don’t?
Yes. The smart money knows that these contractors have "been there, done that" a dozen times before. They’re used to having to contract when Washington, D.C. gets all peace-and-love gushy, like we did at the end of the Cold War, or simply decides defense contractors don’t carry as many votes as seniors or some favored social or ethnic class.
This sector is the ultimate cyclical play. Of the big boys like Lockheed Martin (LMT,) Northrop (NOC,) Boeing (BA,) et al, I like Raytheon (RTN) the best. The reason has less to do with their numbers and valuation, though both are at or near the head of the pack, than what segment of the defense and aerospace industry they occupy.
RTN is huge in sensing technologies, kinetic and non-kinetic effects-based warfare (the latter to include electronic war-fare, cyberwar and directed energy, this last where competitor Boeing’s CHAMP system is also cutting-edge,) C4I—Command, Control, Communications, Computers and Information/Intelligence, and direct mission support via engineering, training and logistics management. This administration will be anxious to cut defense spending to fund favored social engineering, but I think the big targets like warships, airframes, and the Future Future Future Combat System version 17 will be the cuts of choice. Training, readiness, cyber-defense C4I, and game-changing non-kinetic effects will be needed more than ever, to compensate for the loss of personnel and leading-edge warfighting equipment. I’m going to look to buy Raytheon at a lower price as the defense cuts start making it to page one and investors begin to panic out.
In the meantime, we’ll be buying a pip-squeak (by comparison) competitor in this space whose products I’ve had some dealings with in the past: Kratos Defense & Security Solutions (KTOS.) Boeing’s market cap is more than $64 billion. Kratos? $280 million.
Boeing employs 174,000 workers. Kratos? 4,300. Boeing had gross revenue of some $82 billion last year — that’s right, almost triple the entire cruise industry! KTOS? Not so much. Just under a billion. Ah, but
that’s their present situation; we’re more interested in the future. And their $1.2 billion backlog is in absolutely every niche that makes Raytheon my favorite pick of the biggies, but in even more specialized areas.
The company is currently unprofitable, making it a candidate for our Aggressive Growth portfolio. If you decide to join us in this more speculative investment, please bear in mind that the company is growing assets faster than revenues and that revenues “have been” in decline, and their net cash position is perilously low.
So why buy them? All these caveats I’ve noted are based upon current snapshots or are backward-looking. I see KTOS’s backlog expanding significantly mostly because I know most of the programs in which
they are involved. In many cases, there is literally no other competitor, which means they will likely bid on single-source contracts, enhancing their profit margins and cash flow as their sales increase. It’s more risky than RTN or BA, of course — but one I’m willing to take...
At first blush, energy services midget Pacific Drilling (PACD) appears to be every bit as speculative as Kratos at first seemed. After all, their entire asset base currently consists of a grand total of four drillships they contract out to Big Oil. Four drillships…
Why bother, you ask? Let me count the ways:
- PACD has the newest fleet in the world. Newer means higher-tech and lower-cost.
- PACD is exclusively focused on “ultra” deepwater drilling. This is where I believe the future lies. Bakken may have hundreds of little finds but one elephant lurking deep under the surface of the earth’s crust deep under the ocean will trump every one of them. PACD’s drillships can drill below 2.5 miles of water.
- PACD has three more drillships being built for them right now and another on order. With contracts in hand from major oil companies like Chevron (CVX), Total (TOT)and Petrobras (PZE), all costs are covered.
- PACD gets an average of about $550,000 per day per ship. That’s $550,000 x 4 ships x 365 days a year, or $80 million in revenue. When the next four ships come on line between this quarter and 2015, that should double. The demand worldwide for these drillships outstrips the supply. That situation will not improve in the next 2-3 years.
- I see PACD’s revenues, cash flow and earnings accelerating rapidly over the coming years.
We have established a pilot position in each and will buy more on general market weakness.