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Inspecting the World’s Largest Cruise Operator

January 31, 2014 | About:
Patricio Kehoe

Patricio Kehoe

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The cruise industry is one of the most underpenetrated markets in the world. Despite a core target audience of 133 million people in the U.S. alone, only 25% of these have lived out the cruise experience. And those who did probably turned either to Royal Caribbean Cruises Ltd. (RCL) or Carnival Corporation (CCL) for a package deal, since these two companies control 75% of the global cruise market. But let’s see what it is about Carnival Corporation that has caught investment guru John Hussman (Trades, Portfolio)’s attention enough to add more of this company’s shares to his portfolio.

Cruising All over the World

As the world’s largest global cruise company, Carnival Corporation owns over 100 ships and operates 10 brands worldwide, which attract an anual customer base of 10 million. This extensive portfolio includes among others the Carnival Cruise Lines, Princess Cruises and Seabourn in North America; AIDA in Germany, Costa Cruises in Southern Europe, and the P&O Cruises in both Australia and the UK. This firm also owns the tour company Holland America Princess Alaska Tours, which operates in Alaska and the Canadian Yukon. However, it’s the company’s 200,000 passenger ship capacity that has allowed it to reach a diverse group of consumers in a lightly penetrated vacation segment, earning it $15.5 billion in revenue.

The global cruise market is a largely untapped industry, an aspect that Carnival Cruise benefits from greatly. With the 65 and older demographic growing at a 36% rate between 2010 and 2020, while the cruise industry’s capacity grows at 3%, baby boomers looking to retire and spend their money on leisure will surely be swooped-up by this industry giant. In fact, the company’s long-term business model is focused on international expansion, especially in the Asian continent. In 2013, for example, the firm opened its second office and launched a home port in Japan, in addition to other office openings in China (5), South Korea (1), Taiwan (1), Hong Kong (1) and Singapore (1). The larger international presence, combined with an improving economic environment and increasing cost leverage, should help boost operating margin from its current 10.70%.

Competitive Advantages vs. Brand Perception

Now, Carnival’s efficient scale, cost advantages and strong fuel efficiencies put it at a competitive advantage towards new market entrants, given that the company splits the current cruise market ownership with Royal Caribbean. And the $500 million costly cruise ships make it virtually impossible for new competitors to scale up quickly. However, the Costa Concordia incident of July 2012, along with Carnival’s Triumph cruise ship’s engine fire in February 2013 and March 2013’s Carnival Dream equipment problems shattered passenger confidence and resulted in subdued bookings. Consequently, EBITDA growth experienced a negative growth of 2.20%, along with a negative EPS growth of 9.30%. And 2005’s return on capital of 12.40% dropped to a mere 4.1% in fiscal 2013.

Nevertheless, the cruise giant is determined to regain its customer base and improve its brand perception, and therefore launched a series of initiatives to boost profitability. The introduction of a new dining and bar concept and new on-board entertainment programs, like Dancing with the Stars at Sea or the Hasbro game show, will surely attract more passengers on the cruise fleet. Higher ticket pricing, the national advertising campaign, and a favorable booking environment, along with money-back program Great Vacation guarantee, are bound to restore profitability levels and bump up the current revenue yield of 5.7%.

Bottom Line

The company’s position as largest cruise operator will continue to allow leverage on items like port commissions, marketing, overhead costs and maintenance efficiencies. Therefore, I feel bullish about this cruise giant’s long-term future. As long as no more major incidents occur at sea, Carnival Corporation will be able to lift profits and achieve an even larger market share of the global cruise industry.      

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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