Will rogue wave hit cruise ship stocks?

Investors looking for signs may have found one in the form of 30 foot monster waves that hit a cruise ship in the Mediterranean.

By Jamie Dlugosch Mar 4, 2010 1:31PM

Credit: (© Manu Fernandez/AP)The cruise ship industry continues its recovery from a crippling recession that resulted in declining sales. Shares of Carnival Corp. (CCL) and Royal Caribbean (RCL) have rallied significantly since bottoming last year.


Does news of monster waves hitting a cruise ship in the Mediterranean signal a market top for these industry titans? If you are superstitious you might be tempted to do sell with this news.


See: 5 stocks insiders are buying


Of course the reality is that the cruise industry is regaining its health and while this singular story may be tragic it is unlikely to have any impact on customers interested in sailing the high seas.


What ultimately matters with any stock is valuation.


Both Carnival and Royal Caribbean have rallied on the strength of operating performance and a future outlook that bodes well for growing earnings.


On the surface it is always difficult to buy a stock after it has risen significantly.


In the case of Royal Caribbean that price increase has been quite substantial. In the last year shares of RCL bottomed at $5.53 per share, but now trade for almost $30.


That is a huge gain and for the intuitive types the rogue wave in the Mediterranean might be saying, “time to sell, time to sell, time to sell”.


Upon closer examination the gains in RCL are justified based on a profit in 2009 of $.47 per share. Analysts are expecting that number to jump to $1.83 in 2010 and $2.40 in 2011.


Those are heady growth numbers for sure, but on a forward basis RCL trades for just 16 times 2010 estimates. Considering earnings are expected to triple this year and then add another 30% in 2011 such a price is cheap.


For Carnival the analysis is similar. CCL did not fall as far as RCL thus its recovery has not been as steep. Shares have essentially doubled in value in the last year.


CCL made $1.86 in its last fiscal year. Analysts expect the company to make $2.25 in fiscal 2010 and $$2.65 in fiscal 2011. At $36 per share CCL trades for 16 times forward earnings.


That too is cheap considering expected earnings growth of 20%.


The seas may be rising and waves certainly are crashing, but both CCL and RCL look cheap to me at current prices. Given a strong recovery, these rogue waves will prove to be nothing more than a sensational event.


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