After Today's Move, Is This Stock a Bargain?
In the wake of the cruise disaster off the Italian cost in the Tyrrhenian Sea, Carnival Corporation (NYSE: CCL) has seen its stock price plummet by over 13% as investors digest the news.
Over the weekend, a cruise liner run by Carnival's Italian subsidiary Costa Concordia ran aground and subsequently sunk. Since then, the captain of the boat was blamed and has since been detained for manslaughter. Six people died in the crash, but the ship was carrying 4,000 people, including passengers and crew.
In light of the crash, Morgan Stanley cut Carnival's estimated EPS by 30% on the expectation that the crash will spook travelers and the company will see bookings for its cruises fall. Other analysts expected the stock to be negatively effected in the short-term, with a rebound expected in the long-term.
The obvious takeaway for investors is to buy while the stock is artificially lower, but has the stock hit a bottom as investors shy away after the recent accident?
Carnival is traditionally a stable and reliable stock, with a solid dividend that began to recover in 2011 after the subprime mortgage crisis. However, at the end of 2011 it saw net profit margins contract as increased competition for vacationing dollars drove prices for trips down and forced the company to temporarily suppress its operating margin while consumer spending stayed low. Now that consumer spending in the U.S. is beginning to recover, there is a potential upside to Carnival that is making this morning's market selloff seem like an overreaction.
On the other hand, problems in Europe persist, and with that continent's large coastline and historical attachment to the sea, European cruises are a big business. Carnival has not invested as heavily in its operations since Q1 2011, as the company expected revenues to fall--which they did--thanks in no small part to lower consumer confidence, flat or declining wages, and high unemployment amongst middle class consumers who would normally spend their money on vacations such as cruises.
Depressing results and a lower demand for cruises put pressure on Carnival's stock in 2011 even as the company increased its dividend, making the dividend yield nearly double what it was in 2010. Last year saw its dividend return to pre-crisis levels saw in 2001-2007. The increased dividend yield has made it an attractive play for investors looking for income, but the dividend couldn't stop the stock from plummeting nearly 30% in 2011.
The drop in part resulted in Deutsche Bank reiterating its buy rating for Carnival today although they have dropped their target price to $38 after a 30% drop in their estimated EPS for 2012. All of this bad news might spell out a great opportunity; after an abysmal year and a struggle to keep profit margins in the black, Carnival's stock price has fallen and the company has reached a P/E ratio of 12.30.
There is also the fundamental soundness of Carnival's business model. Cruises remain popular and have grown in popularity over the past decade. Baby boomers, who are Carnival's key demographic, are beginning to retire and should retire at a faster pace in the next decade. With a surge in retiring boomers, Carnival may see a surge in its revenues.
However, it may take a long time for the company to benefit from boomer retirements, making the stock a long-term play for bullish traders, while bearish investors might expect further declines in the short term if the market continues to be spooked by the crash.
There may still be pressure to go lower to match Royal Carribean Cruises (NYSE: RCL), which has a P/E ratio just under 10. Royal Caribbean Cruises is also down nearly 4% in intraday trading on news of the crash. We might see Carnival's P/E fall to its main competitor's level before recovering, and that may take a while.
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