Carnival Corp CCL
October 18, 2000 - 2:24pm EST by
2000 2001
Price: 20.50 EPS 0
Shares Out. (in M): 585 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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CCL is the market leader in terms of assets, revenues, financial performance in the cruise industry. Since its incorporation CCL has been the industry's continuous innovator (and disruptive force), building upon a new vision of cruising for the masses. In the process of unseating its older cruise industry rivals, and becoming the leader in cruise passengers carried, CCL built a financial powerhouse that it utilizes to command the industry’s dominant position--and by which it can extend its lead.

CCL management has very consciously followed a Vegas-style script in building their flagship Carnival Cruise division. Cruise ships--like luxury hotel-casinos--are destinations in themselves. Having the financial wherewithal to continue building, developing, and improving the 'destination' is not only a fact of life, but a core competitive advantage. In addition, CCL has leveraged its scale to grow and acquire its way to complete 'vertical integration' in the cruise industry. (Another innovation.) Each of its cruise divisions represents a differentiated brand focused on a segment of the cruise market but all benefit from the scale and resources of the parent.

CCL carried 43,810 passengers in 1999. By December 2004 CCL will offer daily cruise berths to carry 73,000 passengers, a 73% increase in capacity. Perhaps most significantly, CCL will achieve this capacity increase almost entirely through internally generated funds. (Unlike its foremost competitor RCL.)

A few comparisons between CCL & RCL:

I. Financial strength:
1. Quick ratio: CCL .47 RCL .17
2. Total debt/equity: CCL .15 (5/31/00 10Q) RCL .70
3. Cash: CCL $546M RCL $102M

II. Operations ttm: 11/31/99
1. Revenues ttm: CCL $3.65B RCL $2.64B
2. Operating Margins: CCL 26.52 RCL 19.30
4. Net % of Revs: CCL 26.85 RCL 15.10
5. ROE: CCL 18.28 RCL 13.71

III. Growth: past 5 yr avgs:
1. Revenues: CCL 14.13% RCL 16.8%
2. EPS: CCL 19.96% RCL 12.89%
3. Cap spending: CCL 7.66% RCL 46.23%

At the end of May, CCL announced that "as a result of projected higher fuel costs, and lower prices per berth ('passenger yields') earnings were expected to be flat for the remainder of FY 2000." As a result there was a sharp sell-off, and analysts revised their estimates lower for FY 2000 (1.71) and FY 2001 (1.92). Earnings growth is now expected to be 15% on average over the next 5 years. A 15% compounded earnings growth rate would imply FY ’04 EPS of $2.99 (Previously announced ship-construction and acquisitions will grow berth capacity at 18% compounded, so a 15% EPS growth estimate seems conservative.) Current dividend yield is 1.93%.

CCL's historical P/E range is 37-12. (It's current trailing multiple is 13.) Based on the now-reduced earnings estimates, and the current share price, the FY 11/00 multiple is 13.3/FY01: 11.85.

Given its dominant position in the cruise industry, and an advantage that is growing, investors could expect a return to a more ‘normalized’ multiple of 15-18 at the very least between now and the end of 2004. (Still well below its historical average.) This would suggest a future share price between $45-54, 98-137% above its current level--a compounded share increase of 25-35%. Management must also feel its shares are undervalued. A $1B share repurchase program was authorized on 2/28/00 of which $311.6M had been utilized as of 4/12/00. Share buybacks of this magnitude will also help boost EPS.


Given its increasing strengths, and $1B+ in annual operational cash-flows, CCL shares offer excellent value to the longer term investor. Recent selling as a consequence of current results (in part negatively impacted by FY 99’s unusual Millenium Cruise pricing) and the cloudy retail climate overlooks the numerous longer-term positives. In the last 3 years, CCL’s opportunistic acquisitions (including the purchase&-105;with cash&-105;of Cunard Lines, parent of the QE2) has positioned it for significant future growth.
Note: In recent days the turmoil in the Middle East has knocked several dollars off the share price, offering an even better entry point.
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