The February fire on Carnival‘s (NYSE:CCL) Triumph cruise liner (an event that has since garnered the lovely moniker “poop cruise,” for good reason) made for a shipload of horrendous stories and imagery.
But there was a silver lining to the lawsuit-generating disaster: bargains — for both travelers and investors.
Customers understandably haven’t been as eager to sign up for cruises of late; booking for the company’s Carnival-brand ships slid in the three-week period after the Triumph mishap. Well, CCL is trying to lure back those customers by advertising four-night Carnival cruises for as low as $38 per night — cheaper than a stay at Motel 6, as Bloomberg points out.
Of course, while you can almost hear the margins being sliced by such bargain-basement prices, bear this in mind: People like to panic following disaster, but they also like to forget. And that could mean Carnival is ripe for a rebound.
See, the cruise cycle looks something like this: Disaster strikes (example: poop cruise). Travelers panic and don’t book cruises. Investors panic and flee the stock, which subsequently falls.
CCL has shed 12% since the Triumph disaster, and even Royal Caribbean (NYSE:RCL) has slid nearly 9% since then as investors have gone full-bearish on cruise companies in general. (A poop cruise will do that to you, I guess.)
Something similar took place in early 2012 following the Costa Concordia disaster.
Costa — a division of Carnival — had a ship run aground on Jan. 13, 2012, injuring 64 people and killing 32. In the two weeks following the shipwreck, Carnival stock shed 8% and Royal Caribbean shed 3%. So the cycle began.
Next phase? Cruise prices drop. It’s simple supply-and-demand, mixed with a marketing move to try to woo back wary customers. For cruise companies, like sporting venues, it’s better to have people aboard the ship, even at a reduced admission, so they can still make money on food, drinks and other items.
Travelers start booking cruises again because people love bargains, and bargains make them forget. Then they keep booking cruises — even at higher prices — because the disaster has faded and because they love cruises.
Investors see this pattern, and the stock eventually recovers.
Consider this: After slipping in the wake of the Costa Concordia shipwreck — a disaster where lives were lost, no less — CCL stock went on to move steadily upward until February of this year. In that time period, Carnival gained nearly 22%, handily beating the S&P 500. RCL performed even better, posting an eye-popping 37% in returns.
Already, Carnival’s rebound looks to be underway for this cycle. While it is indeed offering deals, Vice Chairman and Chief Operating Officer Howard Frank had said on a March 15 conference call that “fares were running slightly ahead of last year,” according to Bloomberg. Once again, only the Carnival-branded ships have dropped off … and the article reported such volume has already recovered.
Sure, Carnival recently cut its profit forecast for the year to $1.80 to $2.10 per share, down from a maximum of $2.40 a share previously. But that makes for an even better opportunity.
The cut was thanks to the Triumph incident — and undoubtedly the lower prices it spurred — along with expenses to bolster backup systems on other ships. In other words, it was from a one-time incident. That means such a lowered earning range comes with built-in growth, in a sense, as it’s an easy year-over-year comparison for the following year.
Analysts expect Carnival to post an EPS of $2.63 for 2014, which is 25% more than the upper end of 2013’s range … and a mere 13 times CCL’s current slashed price.
There are other factors to consider. For one, cruise stocks are sensitive to the economy as it is, considering that vacations are discretionary spending at its finest. But as long as the economy keeps trucking as it has been, there’s no reason to think cruise stocks won’t keep cruising, too — and there’s no reason to see the recent selloff as anything other than a prime entry point.
Disaster, panic, selloff, forget, rebound, rinse, repeat.
You can see the cycle in motion. Just be sure to get in before you miss the upswing.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.