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Carnival Corporation - Ghost Ship Investing?

March 21, 2010 | About:

The wind blew with such ferocity the passengers believed any second they would be swept over the side of the mighty ship, followed soon thereafter by the ship itself.

The captain, eyes never leaving the horizon though there was nothing for them to see but God's wrath, told the helmsman to keep a steady hand that all would be well soon enough since the eye of the typhoon had passed them over near an hour before.

The first mate unknowingly began to pray aloud, telling his God he was not yet ready to visit , while the ship's engineer, also unknowingly aloud, began cursing himself for not only allowing a woman into the wheelhouse, but one that whistled and carried a black sea bag.

Without warning the ship began to roll hard to port. The helmsman fought to keep the huge ship upright as the captain screamed for more speed.

But just as the ship's massive brass screws began to increase their revolutions there was a tearing of metal, followed by a muffled explosion deep within the bowels of the huge ship.

In that instant the captain knew his days of roaming the world's seas had come to an end, that another sunrise, he would never see.

With one final shudder, the starboard screw, in full revolution, broke through the waves, and without warning another ship became a permanent guest in the house that Neptune ruled.

On Tuesday, March 23, before the , (NYSE:CCL) will report earnings, expected by to be $0.14 a share, $0.19 a share lower than a year ago.

What gives us pause is that the price of the stock is up almost 15% over the past 5 weeks yet analysts are predicting lowered earnings.

While we may not be experts, we do know the difference between walking up a and walking off a plank.

Financial information related to the Carnival Corporation, contained in this report, is based on the company's for fiscal year ending November 30, 2009, as filed with the Securities and Exchange Commission on January 29, 2010.

Carnival Corporation and Carnival and Carnival plc is a global cruise company and one of the largest vacation companies in the world. Their portfolio of cruise brands includes Carnival Cruise Lines, Holland America Line, Princess Cruises and Seabourn Cruise Line in North America; P&O Cruises, Cunard Line and Ocean Village in the United Kingdom; AIDA in Germany; Costa Cruises in southern Europe; Iberocruceros in Spain; and P&O Cruises in Australia.

These brands, which the company claims comprise the most recognized cruise brands in North America, the United Kingdom, Germany, Southern Europe and Spain, offer a wide range of holiday and vacation products to a customer base that is broadly varied in terms of cultures, languages and leisure-time preferences.

The company also owns two tour companies that complement its cruise operations, Holland America and Princess Tours in Alaska and the Canadian Yukon. The company also claims that combined, the company's vacation companies attract eight million guests annually.

Carnival Corporation is incorporated in Panama, and Carnival plc is incorporated in England and Wales and operate as a dual listed company (“DLC”), whereby the businesses of Carnival Corporation and Carnival plc are combined through a number of contracts and through provisions in Carnival Corporation’s Articles of Incorporation and By-Laws and Carnival plc’s Articles of Association.

The two companies operate as if they are a single economic enterprise, with a single executive management team and identical Boards of Directors, but each retains its separate legal identity.

The company competes with (NYSE:RCL), and Disney Cruise Line, a division of (NYSE:DIS).

The time to have taken a short-term position in this stock was back in late Novemeber2009, or in very late December 2009, or in the later part of January 2010.

At the moment, the stock is overbought, and basis the we watch, it has been overbought since almost the middle of February 2010.

The stock closed recently at $37.62 and would require only a 2% gain to reach first resistance of $38.37, while first support would allow the stock price to fall 8% from its recent close.

Considering that the recent price is almost 2% above the stock's 13 day moving average and almost 7.5% above the stock's 50 day moving average, we think taking a short-term position at this time would be fool hardy.

If anything, we would think given the current short-term conditions, the stock makes a better short than short-term investment.

With the possible exception of the company's trailing twelve month PE ratio, of the investment metrics we like to focus on, there was not one that we consider investment quality.

Current liabilities exceed current assets by almost 2:1, debt exceeds EBITDA by almost 3:1, return on invested capital is less than 10%, and the debt to cash ratio is almost 19:1.

While the company does appear to pay a reasonable average interest rate of less 4% on its almost $8 billion dollars of debt, with net operating profit after taxes of less than 24%, and CAPEX consuming almost 6% of that, we wonder just how long it will take to reduce the company's debt to something far more manageable.

In addition, while free cash flow did improve from $0.59 in FY2008 to $1.04 in FY2009, we simply don't believe the improvement is sustainable.

The stock has an Enterprise Value (Market Cap less Cash plus debt) of $47, an Equity Value (Market Cap plus Cash less debt) of $28, and a Tangible Book Value of $17.

We think a Reasonable Value Estimate for the stock is in the in the $23 to $26 range, and note that at least to us, free cash flow at 36 times recent pricing makes the stock incredibly expensive.

The ship's captain told the helmsman to keep her steady, that he had sight of a large object dead ahead. He further instructed the helmsman to continue to follow the oil slick drifting with the current on the calm sea.

As the captain's ship approached the massive object, the captain shook his head, telling the first officer that what he was seeing was impossible.

Yet there on her side, her starboard screw spinning well above the surface of the sea, was the Fester, lost with all hands and all passengers more than 80 years ago.

Was this a ghost ship worthy of investment in her salvage wondered the captain, or merely an illusion made all the more real by the rumors surrounding her?

To download the Wax Ink Carnival Corporation Raw Value worksheet, .

About the author:

Wax Ink is a baseline equity research company not licensed or registered with any government agency

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