Carnival Shares — 3 Pros, 3 Cons

by Tom Taulli | September 21, 2011 2:40 pm

Does anyone really not like cruises? It seems unlikely. But when it comes to investing in the industry, there is definitely skepticism. Take a look at Carnival (NYSE:CCL[1]). After reaching $47.63 in February, the stock price is now at $33.88.

In Carnival’s earnings report on Tuesday, there was a nice pop of about 5%, however. For the most part, the company benefited from a fairly strong summer. Revenues increased by 12%, to $5.06 billion, with profits coming to $1.34 billion, or $1.69 per share. The Street was expecting $4.9 billion in revenues and $1.64 in EPS.

So might it be a good time to consider the stock? Let’s take a look at the pros and cons.


Global platform. Through acquisitions and internal development, Carnival has assembled a strong portfolio of brands. Examples include the Holland America Line, Princess Cruises, Cunard Line (UK), AIDA (Germany) and P&O Cruises. What’s more, Carnival has its own tour company, which provides lots of synergy for its core business.
Growth opportunity. For the most part, the cruise industry has fairly low penetration rates. In North America, only about 3.1% of the total population goes on a cruise. Europeans are even less inclined to set sail: the penetration rate there is 1.2%. Yet with the aging of the world population, it is likely that there will an increase in overall demand. Consider that over the next decade, the number of people over 45 will grow by 15% in the US and 12% in Western Europe.
Capacity. No doubt, it is extremely costly to build new cruise ships. And yes, it’s a significant barrier to entry for companies like Carnival. In fact, the overall supply of cruise ships is likely to remain stagnant over the next few years, which should help allow for better pricing power.


Geopolitics. Want to travel to Egypt? Maybe not. The fact is that with political revolution spreading across the Middle East, travel in the region is a tough sell for cruise operators. There may also be issues in Europe, where the debt crisis has precipitated growing unrest in countries like Greece.
Price pressures. The global increase in commodity prices has definitely had an adverse impact on Carnival. The company must deal not only with fuel costs — which spiked 45% over the past year — but also higher prices of food. There are even big impacts from currencies. If anything, recent global volatility has been a negative factor.
Competition. Even with the strong barriers to entry, there are still major rivals. They include operators like Royal Caribbean Cruises (NYSE:RCL[2]) and Norwegian Cruise Line Holdings. There are also a variety of local operators.

The Verdict

Carnival does rule the seas. But the company also has been smart to focus on cost cutting as well as strategic acquisitions to find growth opportunities. True, in the short-run, there are likely to be challenges, but Carnival has wherewithal to deal with them.

And in the meantime, Carnival is paying a decent dividend of about 3%. The company also has been aggressively buying back its stock. Since mid-August, the purchases have come to about $445 million.

So in light of all these positive factors, the pros outweigh cons on the stock for now.

Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.

  1. CCL:
  2. RCL:

Source URL:
Short URL: