Cruising for Profits

10/01/2004 12:00 am EST


Gordon Pape often looks for strong sectors and then finds the best stocks within that group. David Fried looks at share buybacks, and Beth Gaston uses technical and contrary sentiment analysis. Despite these various approaches, all three like Carnival Corp.

(For more information on the advisors cited below, please click on their photos.)

Pape, Gordon"Over the last 20 years, cruise lines have invented a new type of vacation by making the ship, rather than the destination, the highlight of the trip," says Gordon Pape in the Internet Wealth Builder . "We now have 145,000-ton ships, with cabin capacity for 3,000 people, fully equipped with gambling casinos, spas, rock climbing facilities, even ice skating rinks. And North Americans are clamoring for more. In 1970, there were four cruise ships afloat; today there are 142 in service and seven on order. The industry estimates that more than 10 million people will cruise this year compared to 7.4 million in 2002. A recent industry survey showed that only 11% of North Americans have ever set sail and cruising still attracts only 2% of the entire leisure travel business. There is enormous growth potential.The company that I most prefer is Carnival Corp. (CCL NYSE), which pays a 50 cent dividend to yield 1.1%. Carnival is the pre-eminent cruise line company and operates through 12 brand-name subsidiaries that include Holland America, Princess, and Cunard. Following a merger with P&O last year, CCL now has 75 ships with more than 123,000 berths in service and offers a full range of cruises from short, moderately-priced trips to lavish extended voyages. Revenues of $8.8 billion are expected this year with a 10% jump to the $10 billion range in 2005. This is a company on the move. The Queen Mary 2 has just entered service and CCL plans to add two or three large ships to its fleet each year in the future. We look for earnings of about $2.25 a share in 2004, up from $1.66 last year, and $2.75 in 2005. Buy CCL with a target of $53."

Fried, David"Carnival is the only entity in the world to be included in both the S&P 500 and the FTSE (one of the most widely used stock market indices in the UK)," notes David Fried, editor of The Buyback Letter. "As one of the leading cruise operators in North America, Europe and Australia, Carnival has 12 distinct brands -- Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn Cruise Line, Windstar Cruises, AIDA Costa Cruises, Cunard Line, P&O Cruises, Ocean Village, Swan Hellenic, and P&O Cruises Australia. These brands operate 77 ships totaling more than 128,000 berths, with nine new ships scheduled for delivery between November 2004 and December 2006. Carnival also operates the leading tour companies in Alaska and the Canadian Yukon -- Holland America Tours and Princess Tours. And if that isn't enough, the company also makes money from other onboard activities and services such as casino gaming, bar sales, gift shop sales, entertainment arcades, shore excursions, art auctions, photo sales, spa services, bingo games and lottery tickets, video diaries, snorkel equipment rentals, Internet and telephone usage, vacation protection programs and promotional advertising by merchants located in its ports of call. For the six months ended 5/31/04, revenues rose 78% to $4.24 billion. Net income totaled $535 million, up from $255 million. Earnings reflect improved operating margins. Carnival has repurchased 5% of its shares outstanding over the past year."

Gaston, Beth"Carnival Cruise Lines recently sailed into the earnings confessional to announce third-quarter results," notes Beth Gaston, analyst with Schaeffer Investment Research. "The firm collected $1.23 during the reporting period, up from 90 cents one year ago. Revenue surged nearly 30%to $3.25 billion. Looking forward to the next quarter, CCL thinks Hurricane Frances resulted in a per-share earnings loss of three to four cents, while the relocation of the Cunard line's North American organization will cost the firm one to two cents in the fourth quarter, bringing total fourth-quarter earnings to 30-32 cents per share. CCL has rallied to a new high today, overtaking short-term resistance at the 48 level. CCL has been an impressive name in this relatively stagnant market, enjoying an uptrend since the first quarter of 2003. The equity's open interest ratio has been on the rise since hitting a short-term bottom in mid-July. Turning to other sentiment factors, a note of pessimism is evidenced by the 15 million CCL shares sold short, which amounts to a short-interest ratio of 7.5 days to cover. If CCL continues to explore new annual-high territory, some of these bearish investors may scramble to cover their positions, thereby providing the equity with an added boost."

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