The voyage that shareholders in cruise ship operator Carnival have been on this year has been enough to turn the hardiest seafarer green around the gills. The share price has lurched up and down on waves of sentiment, but is currently adrift - down 28 per cent since the start of the year compared with a 9 per cent fall for the FTSE 100 index. We think that a recent revival in the share price is likely to prove another short-lived wave of optimism rather than an about-turn, so reckon this is an opportune time to jump ship.
It's not so much that the reasons for the recent share price rise don't hold water. Rather, it's the iceberg of horrendous consumer confidence that has us reaching for the life jackets. Carnival's recent third-quarter trading statement showed signs of booking weakness in August and September. Advanced bookings for the rest of this financial year and start of next year are at a lower occupancy level, although with higher prices. And one reason for encouragement from the update is that Carnival is attracting more US holidaymakers, who think a cruise is better value than a package holiday.
However, the value credentials of cruises can surely only go so far. With consumer confidence in the US and other key Western markets revisiting recession levels, the outlook is grim. That's why City analysts have been downgrading their earnings estimates, although they think Carnival's dividend will continue its journey back towards pre-credit crunch levels of $1.60 per share. If we are right about the poor outlook, it is likely to hit both occupancy levels and the prices at which berths can be sold - one of the reason why the "floating hotels" business is so cyclical. Meanwhile, demand in other markets has been subdued due to political unrest in north Africa and the Middle East as well as natural disasters. While markets should recover from these shocks, a trading update from tour operator Tui Travel, as well as Carnival's own update, suggest a return of confidence may be a long time coming.
| Carnival (CCL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 2,106p | MARKET VALUE: | £17.3bn | |
| TOUCH: | 2106-2107p | 12-MONTH HIGH/LOW: | 3,234p | 1,677p |
| DIVIDEND YIELD: | 4.0% | PE RATIO: | 13.1 | |
| NET ASSET VALUE: | 2,054p | NET DEBT: | 39% | |
| Year to 30 Nov | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2008 | 14.9 | 2.38 | 296 | 160 |
| 2009 | 13.5 | 1.81 | 227 | nil |
| 2010 | 14.5 | 1.98 | 251 | 40 |
| 2011* | 16.0 | 1.99 | 244 | 100 |
| 2012* | 16.8 | 2.03 | 247 | 130 |
| % change | +5 | +2 | +1 | +30 |
Normal market size: 2,000 Matched bargain trading Beta: 1.2 * Shore Capital forecasts $1=£1.541 | ||||
The poor outlook may exacerbate the long-term decline in Carnival's returns. According to broker Shore Capital, its return on equity has fallen from about 20 per cent in the 1990s to 8 per cent currently, barely more than its cost of capital. This is a concern for an industry in which heavy investment is needed. However, Carnival has eased back on its capital spending, which, perhaps oddly, has been another reason for the recent bout of investor optimism.
The group has pledged to keep a tight control on capital spending and to reduce capacity in an attempt to push up the yield from its berths and to return more cash to shareholders. The plan is to return all free cash from next year, and this year the company has already bought back $445m-worth of shares. This brings benefits, but the prospect of less investment also brings the concern that prospects will be damaged and that Carnival will find it harder to raise prices in the future.
Management is also working hard to keep costs down: it expects net cruise costs to increase by just 1 per cent in 2011. Unfortunately, it can do little about one major cost: fuel. The rocketing price of oil means management expects fuel costs to rise 45 per cent in 2011. Shore Capital calculates that every $5 rise or fall in the price of Brent crude translates to minus or plus 13¢ per share in earnings for Carnival's shareholders.
On this basis, the recent drop in the oil price from $127 to $108 looks positive. However, the oil price is falling in anticipation of an economic horror show, which arguably could more than offset the benefits. And should the outlook improve, which looks fairly unlikely, the oil price could rise again.
