Last week, Princess Cruise Lines, one of the subsidiaries of Carnival Corp. (CCL, Financial), pleaded guilty to seven federal charges in relation to illegally dumping oily waste into ocean water.
The cruise line, based in Santa Clarita, California, is set to pay a record fine of $40 million as a result. In addition, cruise ships from eight Carnival cruise line companies (Carnival Cruise Line, Holland America Line NV, Seabourn Cruise Line Ltd. and AIDA Cruises) will be under a court-supervised Environmental Compliance Program (ECP) for five years according to the Department of Justice.
Carnival shares were down 3% at market close.
(Guardian)
Valuations
The largest leisure travel company in the world currently trades at a trailing 12-month price-earnings (P/E) ratio of 15.46 times (industry median: 21.56), price-book (P/B) ratio of 1.6 times (industry median: 1.7) and price-sales (P/S) ratio of 2.36 times (industry median: 1.76; 1). Carnival also had a trailing 12-month dividend yield of 2.69% with a 40% payout ratio.
Market performance
Meanwhile, Carnival underperformed year to date with -5% while the Standard & Poor's 500 index returned 9.45%. For the past five years, the $38 billion cruise company still underperformed the broader index with 11% versus 14.42%.
(Carnival)
Earnings performance
In late September, Carnival delivered its fiscal third-quarter and nine-month operational results including forecast. Carnival had a sales growth of 3.76% to $12.45 billion and an amazing 46% profit growth to $2.17 billion.
As observed, operating costs related to fuel for the cruise company were 34.9% lower for the period and accompanied by reduced nonoperating expenses associated with derivative losses on fuel that resulted in improved profitability for the company.
“We delivered the strongest quarterly earnings in our company's history affirming our ongoing efforts to expand consumer demand in excess of measured capacity increases and leverage our industry leading scale. Revenues during the peak summer season were bolstered by strong performances from both our North American and European brands and across all major deployments including the Caribbean, Alaska and Europe." – Carnival President and CEO Arnold Donald
Ă‚
According to the company’s news release, Carnival also signed a memorandum of agreement with shipbuilders Meyer Werft and Meyer Turku for the construction of three new 180,000-ton cruise ships. Two of the ships are to be added to the Carnival Cruise Line fleet in 2020 and 2022, and the other ship will join the P&O Cruises UK fleet in 2020.
Outlook
Carnival expects a 3.5% constant currency growth on its fiscal 2016 net revenue, compared to fiscal 2015. Also, Carnival sees its adjusted earnings per share to grow about 24% midline of its outlook of $3.33 to $3.37 a share.
"We are well on track to deliver nearly 25% earnings growth in 2016. With cash from operations expected to reach a record $5 billion this year, we continue to fund our growth and return cash to shareholders. During the third quarter, we repurchased $700 million of Carnival Corp. shares bringing the cumulative total to $2.5 billion in share repurchases over the past year." – Carnival President and CEO Arnold Donald
Ă‚
On average, Carnival had a 1.66% sales growth for the past five years and -1.76% Generally Accepted Accounting Principles (GAAP) eps growth (2).
(Annual Report)
Carnival
Carnival was founded 44 years ago by Ted Arison who was an Israeli businessman. In 2015, Carnival was the largest cruise company in the world having carried 47% of global cruise guests.
Carnival operates its cruise ships within a portfolio of 10 leading global, regional and national cruise brands. These brands sell tailored cruise products, services and vacation experiences in all of the world’s most important vacation geographic areas (3).
Carnival’s portfolio of cruise brands in North America, Europe, Australia and Asia included Carnival Cruise Line, Fathom, Holland America Line, Princess Cruises, Seabourn, AIDA Cruises, Costa Cruises, Cunard, P&O Cruises (Australia) and P&O Cruises (U.K.). Carnival also operates Holland America Princess Alaska Tours, the leading tour company in Alaska and the Canadian Yukon.
As of 2015, Carnival operated 99 cruise ships globally while it expects another 17 cruise ships to be delivered between 2016 and 2020.
(Carnival Passengers, Annual Report)
As observed, Carnival has been able to grow its passengers consistently for the past half-decade. Accordingly, demographics also point to further growth and indicate future business growth developments for the company (4). Accompanied by this growth, Carnival’s passenger capacity always had been linearly growing upward, too (5).
(Carnival Segments, 10-K)
Carnival had nine leading cruise brands in 2015, which operating segments were discussed. These world-leading cruise brands are aggregated into two geographical segments as North America and Europe, Australia and Asia.
(Carnival Corporation Cruise Brands, 10-K)
North America operations include the Carnival Cruise Line, Princess Cruises, Holland America Line and Seabourn while Europe, Australia and Asia include AIDA Cruises, Costa Cruises, Cunard, P&O Cruises (Australia) and P&O Cruises (UK).
As of 2015, Carnival Cruise Line has the largest passenger capacity among the North America segment, representing 29%, followed by the Princess Cruises (“Princess”) at 20% of total North America passenger capacity (6). In the Europe, Australia and Asia segment, Costa Cruises (“Costa”) had the largest passenger capacity with 17% of the group’s total, followed by AIDA Cruises (“AIDA”) with 9%.
Carnival’s North America segment sales grew 3.2% to $9.87 billion in fiscal 2015 while delivering an operating margin of 18.3%, compared to 10.9% in fiscal 2014.
The Europe, Australia and Asia segment, meanwhile, grew -8.3% to $5.6 billion with an operating margin of 16.6%, compared to 14.5% in fiscal 2014.
Oil price vs. Carnival’s profits
(Carnival GAAP profits vs. Brent Oil price chart; 7)
As one could observe here, Carnival’s profits for 2016 were trailing 12 months, and Brent oil price was averaged on a monthly basis. Nonetheless, there was an almost perfect negative linear relationship of -0.94 between the two sets of data suggesting that as oil price goes down, profits go up over the duration of relationship.
Cash, debt and book value
Carnival had $462 million in cash as of August with $9.39 billion in debt with a debt-equity ratio of 0.41. Carnival also had 10.8% of its $39.3 billion assets in goodwill and intangibles, while having a book value of $22.9 billion, compared to $23.8 billion in November 2015.
Cash flow
(Carnival)
According to its news release, Carnival was able to grow its cash flow from operations by 15.2% to $4.1 billion three quarters into fiscal 2016 operations. Capital expenditures were $2.4 billion, leaving the company with $1.69 billion in free cash flow.
Carnival also allocated 42.6% of its free cash flow in dividends and claimed that it had repurchased a cumulative figure of $2.5 billion worth over the past year.
On average, Carnival used 114% of its free cash flow to hand out dividends and perform share repurchases in the past three years.
Conclusion
Carnival’s operations in recent times were astounding. Not only was the company able to demonstrate growth, but it also exceeded its historical averages. Correlation brought sense when profitability was measured against oil price as the company also spends a good amount of its sales in fuel expenses. In 2015, fuel-related expenses accounted for 15.6%, or $2.2 billion, in Carnival’s income statement.
(Google Finance)
Nonetheless, Carnival sees better days ahead as it orchestrates a good fiscal 2016 following an expected record of $5 billion in cash flow from operations.
Bernstein, in late November, upgraded Carnival shares to outperform while Macquarie had a neutral stance on the company back in early October. Nonetheless, historical averages with historical profit growth average would indicate a low value for Carnival while traditional earnings multiple with a 20% margin from its peers indicated a price of $56 a share.
Also, given the interesting oil price fluctuations that have been occurring, buying Carnival shares would probably be a semicommodity-related type of investment.
In summary, Carnival is a speculative buy.
Notes
(1) GuruFocus data.
(2) Morningstar data.
(3) Annual report.
(4) 10-K: The average age of populations in established cruise regions is increasing. The average age of a cruise guest, which varies by brand, ranges from approximately 40 years to 60 years in established cruise regions.
Between 2015 and 2025, the number of people in the cruise business’ primary age group of 45 years and older is expected to grow by 18 million, or 12%, in the U.S. and Canada, 13 million, or 9%, in the major Western European countries and 1.5 million, or 17%, in Australia.
(5) Annual report:
(6) 10-K: Carnival Cruise Line offers cruises generally from three to eight days with almost all of its ships departing from 15 convenient U.S. home ports located along the East, Gulf and West coasts, Puerto Rico and Hawaii.
Carnival Cruise Line is the leading provider of year-round cruises in The Bahamas, the Caribbean and Mexico and also operates seasonal cruises in New England, Canada, Alaska, Hawaii and Europe.
Princess, whose brand name was originally made famous by the Love Boat television series, has been providing cruises since 1965 and is the world’s largest premium cruise line based on passenger capacity.
Princess offers 150 unique itineraries with cruises ranging from three to 20 days with longer exotic sailings from 25 to 111 days, including two world cruises. Most of its cruises sailing in Asia are from three to five days and cater to its Asian guests.
(7) Me: GAAP profits from Morningstar.com and Brent Oil Futures from Investing.com
Disclosure: I do not have shares in Carnival.
Start a free seven-day trial of Premium Membership to GuruFocus.
