Time to Take a Cruise With Carnival Corp Stock

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CCL stock - Time to Take a Cruise With Carnival Corp Stock

Source: Via Carnival

Carnival Corp (NYSE:CCL) has been experiencing some pretty good growth in its business over the past few years. CCL stock has responded in corresponding fashion. What exactly is going on with Carnival, and what kind of growth can we expect to see in the future?

The cruise line business is fragmented and competitive. In this case, however, brand name and reputation means everything. Most people don’t want to just jump on any old cruise line. That’s because as safe as cruise ships are, the spate of bad publicity regarding on-board illness and unsanitary conditions have stuck with the sector for quite some time.

So it helps to have a big brand name, one that is trusted and is associated with good experiences. CCL has that. It’s a luxury cruise ship company, even through its Cunard brand, and caters to that portion of the market.

But it doesn’t need to be a luxury brand to attract the millions of people who can afford that kind of experience. Carnival has a very solid reputation for the demographic that it targets.

Millennials are going to be a great target for Carnival. This demographic has shown intense interest in spending disposable income on experiences, not toys.

A recent survey showed that nearly half of millennials are more interested in spending their money on experiences than even on a house. That should tell you a lot. That could mean that there is significant new income headed Carnival’s way over the long term.

The issue with cruise line stocks is that they are economically sensitive. Now, the good news is that the metrics for the leisure sector have been good for quite some time, and I believe they are going to become more robust as the Trump economy continues to grow.

Add in the fact that most Americans are going to have higher disposable income in the coming years thanks to the tax cuts, and the macro situation looks very good for cruise lines in general.

Carnival said it expects to grow passenger capacity by 1.9% this year. Carnival hopes to reach compound annual capacity growth of 5% through 2022, as it replaces less efficient ships with more efficient new ones that have more capacity. On top of this, Carnival is going to open up new destinations, such as to Cuba and China.

The challenge from a financial standpoint for any cruise line is costs. This is a very capital-intensive business, and Carnival appears to be making active efforts to reduce expenses, aiming to cut expenses by $80 million this year, which is a little less than 3% of last year’s net income.

It can be difficult to establish a reasonable valuation for a cruise line stock like CCL stock. Part of the problem is that because it is such a capital-intensive business, capital expenditures may fluctuate significantly from year to year, impacting the bottom line. Thus, we have to watch for things like revenue growth and free cash flow.

Certainly from a net income standpoint, Carnival is doing fine. Net income for CCL last year was $2.6 billion. Cash flow has been growing from an operational standpoint. Operational cash flow went from $4.54 billion to $5.3 billion between 2015 and 2017. But to the point regarding capital expenditures, those were $2.3 billion in 2015, $3.06 billion in 2016, and $2.9 billion in 2017.

Bottom Line for CCL Stock

I think that things are looking up for Carnival stock over both the short- and long-term. If you don’t have other leisure stocks in your portfolio, such as hotels, CCL stock may make for a good purchase at this time.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/time-to-take-a-cruise-with-carnival-stock/.

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