Smooth Sailing for Carnival

07/30/2004 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Based on a proprietary quantitative model, The Forbes Growth Investor maintains a list of the Top 50 Stocks, which it considers as strong buys. Here, editor Vahan Janjigian profiles cruise-ship operator Carnival Corp., a new addition to his top-ranked portfolio.

"Carnival Corp. (CCL NYSE) is the world’s leading cruise provider. Its fleet consists of 77 ships operating under 12 well-known brands, which serves three distinct customer categories. The contemporary line targets casual consumers. It offers good value and the shortest duration cruises (three to seven days. Contemporary brands include Carnival, Ocean Village, and P&O Cruises Australia. The premium line caters to a smaller market segment, but one that is willing to pay a higher price for additional quality and services. Itineraries tend to be destination-based and cruises typically last between seven and 14 days. The premium line is comprised of Holland America, Princess, and Cunard, which houses the recently launched and highly publicized Queen Mary 2. Finally, CCL’s luxury line consists of smaller ships that offer the best in service, comfort and accommodations. They also command the highest ticket prices. Brands include Seaborne and Windstar. Collectively, the company’s three lines provide more than 128,000 berths, traveling to nearly all major geographic regions.

"Despite a 53% increase in total revenues (boosted by the acquisition of P&O Princess), fiscal 2003 was a challenging year. On a pro forma basis, which treats the combined company as a single entity in prior years, total revenues rose only 12% of $7.6 billion. Furthermore, two key measures of performancegross and net revenue yields per available lower berth day fell 3.8% and 3.2%. While several factors may have contributed to the decline, the most likely reason was the anticipation and onset of the war in Iraq, which caused many vacationers to change their plans. CCL was forced to reduce ticket prices and suffered a 9% drop in pro forma net income for 2003 to $1.16 billion or $1.45 per share.

"But passengers have regained their nerve and CCL has been enjoying a resurgence in demand. Through the first half of fiscal 2004, revenues jumped 78% and 30% year-over-year on a reported and pro forma basis to $4.24 billion, respectively. Pro forma net income nearly doubled to $535 million or 66 cents per share. Despite higher ticket prices, both grow and net pro forma revenue yields in CCL’s most recent quarter improved by 13.2%, boosting in part by higher occupancy levels.

"Geopolitical tensions are still on people’s minds, but CCL has minimal exposure to troubled regions. Yet a major terrorist strike anywhere in the world would lead to reduced interest in cruises. Another risk is rising fuel costs. They negatively impacted profits last year but have been held in check thus far in 2004. Of course, general ship safety is always a concern, and the Queen Mary 2 was recently forced to add additional fire safety equipment. However, CCL is cruising at full speed. It has added seven new ships since November and expects to add eight more over the next two years. Advanced booking levels for the second half of 2004 are trending sharply higher, and despite higher ticket prices, more passengers are booking further in advance. All of these factors suggest smooth sailing for CCL for the remainder of the year."

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