Carnival: "Too Cheap to Pass Up"

12/15/2016 8:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Over the past five years, this recommended stock has controlled nearly a 50% share of global cruise industry’s passengers and capacity, notes Richard Moroney, editor Dow Theory Forecasts.

Favorable demographic trends and robust consumer confidence are powering operating growth at Carnival (CCL).

The cruise industry is highly concentrated, with the largest four companies taking nearly 90% of the market.

High costs to construct new cruise ships and limited shipbuilding capacity seem likely to deter new competition from entering the market.

Growth efforts for both the company and its rivals will focus on China, where Carnival has operated for about a decade.

Carnival projects that 4 million people in China will take annual cruises by 2020, up from about 1 million last year.

Annual operating profit margins are on pace to reach their highest level in nearly a decade, due to cost cuts and lower marine-fuel prices.

Fuel costs fell 35% in the first nine months of fiscal 2016 and accounted for just 9% of cruise operating expenses, versus 14% for the same period last year.

Rebounding fuel prices could pressure profit margins, though management has hedged slightly more than 50% of expected fuel needs for 2017 and less than 50% of fuel for 2018.

Starting in 2019, Carnival will add to its fleet a new line of cruise ships that offer better fuel efficiency.

For the 12 months ended August, cash from operations rose 21% and free cash flow surged 38% to $1.13 billion. Carnival is not one to hoard excess cash on its balance sheet.

In the past five quarters, the company has announced two dividend hikes, both of which exceeded 15%. Stock buybacks have lowered the share count 5% in the past year.

Earning a Value score of 85, the stock looks too cheap to pass up, especially as its operating momentum seems likely to carry into fiscal 2017 ending November.

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