Should you buy shares in cruise operator Carnival?

Cruise line operator Carnival has cut its profit forecasts again. So should you buy Carnival shares? Tim Bennett investigates.

Cruise line operator Carnival (CCL) has cut its profit forecasts again. So should you buy its shares? Tim Bennett investigates.

What's new?

Carnival- which reports in US$ - today reported its third-quarter figures as Wall Street trading opened. Revenue was 12% higher at $5.1bn, while net income was $1.34bn, ie $1.69 per share.

That was up from $1.62/share for the same period last year, and higher than analysts forecast. The yield, which measures how much a cruise company makes from its passengers after expenses, was also better than expected overall. But while North American yields rose almost 6%, European, Australian and Asian revenue yields dropped 2% mostly due to ongoing Middle East and North African unrest.

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How's the outlook?

Still mixed. There are fewer advance bookings for the rest of 2011 and the first half of next year compared with 12 months previously, though customers are paying more.

"Booking trends during the third quarter have been solid, and we have a strong base of business for the first half of 2012", says the firm. "The increased importance consumers are placing on value continues to drive demand for our cruise products".

But Carnival also said that changes in fuel prices and exchange rates are expected to cut its full-year earnings by six cents per share compared with its June forecast. The firm now anticipates earnings of $2.40 to $2.44 per share for the year. That compares with its prior guidance of between $2.40 and $2.50 per share, which in turn was lowered in June from a previous forecast of $2.55 to $2.65 per share.

What is Carnival?

One of the largest global leisure travel groups, with 8.5 million customers a year. Brands include Holland America, Princess Cruises and Seabourn in North America, P&O Cruises and Cunard in the UK, AIDA in Germany, Costa Cruises in southern Europe, and P&O Cruises in Australia. In total, the firm operates 23 'fun ships' on voyages that range between three and 16 days to various far-flung destinations. Carnival is the only stock listed in both the S&P 500 and the FTSE 100.

What's its history?

Started by the late Ted Arison, a cruise industry pioneer, the company launched in 1972 with a single secondhand ship (the Mardi Gras) and just enough fuel to make a one-way trip from Miami to San Juan. The firm needed big bankrolling by Arison to keep going. But in 1987, 20% of its shares were sold publicly, providing the capital for acquisition-led growth. The Carnival name was adopted in 1994 and, in 1998, Cunard built the world's largest ocean liner, the 150,000-ton Queen Mary II. In April 2003 Carnival merged with rival P&O Princess Cruises.

Who runs Carnival?

Chief executive and chairman is Micky Arison, son of the founder. He also owns the basketball team Miami Heat. Last year he was ranked the richest man in Florida by Forbes, and no. 69 in the whole of the US, with an estimated wealth of $4.1bn. He was paid more than $7m by Carnival in 2009, including a $2.2m cash bonus. Chief operating officer is Howard S Frank, a Carnival veteran since 1989. Head bean counter is ex-Royal Caribbean Cruises staffer David Bernstein.

The analysts

Of the 16 analysts surveyed by Bloomberg, almost two-thirds are bulls, 25% rate the stock a 'hold' and 12% are sellers. The average price target is 2,662p, 25% above the current level, and there are no recent 'sell' calls.

Our view

The shares have jumped 6% on the latest announcement, but are still some 12% below the level of our advice in July that they looked 'more than fully priced'. Carnival remains very dependent on consumer spending, which could stay weak, while oil prices are an added uncertainty. On a current year p/e only just under 14, and yield of below 3%, we stick to our previous view. There are better bets elsewhere.

The numbers

Stock market code: CCL

Share price: 2,135p ($34.1)

Market cap: £17.9bn

Net assets (published end-May 2011): £14.5bn

Net debt (published end-May 2011): £5.6bn

P/E (current year estimate): 13.7

Yield (prospective): 2.8%

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.