Inside Wall Street: Steer clear of cruise line stocks
The Costa Concordia tragedy spells severe headwinds for cruise liners' future bookings.
Vacationers, for sure, will continue going on cruises to seemingly exotic places, but for investors, shares of companies that own and operate cruise ships, such as Carnival (CCL) and Royal Caribbean Cruises (RCL), should be off limits. Wall Street believes investors should stick to dry-land investing for now. The reason: The Costa Concordia disaster that has so far claimed the lives of eight people -- and counting.
"We are downgrading shares of Carnival and Royal Caribbean to neutral from positive as a result of the Costa Concordia tragedy this weekend," says Rachael Rothman, analyst at Susquehanna Financial Group.
Rothman says the downgrade comes to reflect potentially depressed yields from cruises as they are likely to come under pressure following the tragedy experienced in Italy by Costa Concordia, which is owned by Carnival. She slashed her stock price target for Carnival to $29 a share from $40, and Royal's to $26 a share from $39.
Carnival's stock since the Concordia tragedy has already tumbled to $27 on Wednesday Jan. 18, 2012 from $30 on Jan. 12, 2012, and Royal's has dropped to $30 from $35.
Costa Concordia struck a boulder at the Italian coastline late on Friday Jan. 13, 2012, on a regularly scheduled seven-day Mediterranean itinerary.
Rothman says the tragedy that resulted in the loss of lives and injury among the more than 4,000 passengers "will be a severe headwind in bookings in the months ahead." The tragedy occurred, she notes, with the start of the all-important "Wave booking season," a three-month period that can account for close to 35% of annual bookings.
So far, the company estimates the tragedy will cost $40 million in insurance deductibles and have a negative impact on earnings of about 5 cents a share. The loss of the use of the cruise ship is estimated to cost the company about 11 cents to 12 cents a share in its earnings. The estimates for the negative impact on earnings may move higher as more information becomes available.
Rothman reduced her earnings estimates for Carnival to $2.17 a share for 2012 from $2.67 per share, and to $3.50 per share for 2013 from $3 per share. For Royal, she also cut back her 2012 and 2012 estimates, to $2.59 a share in 2012 from $3.02 a share and to $3 a share for 2013 from $3.47 a share.
For Carnival, the potential for growth in its capacity will be cannibalized by existing sales, Rothman figures, which would add pressure on yields, margins and earnings. Other negatives outside of the tragedy include the rising price of oil and further weakening of consumer spending, as well as the strengthening of the U.S. dollar, says Rothman.
The full negative impact on Carnival's net yields on future bookings, while still too early to assess, could be significant, notes the analyst. She figures a 1% move in net yields equals 17 cents a share of annual earnings per share. Costa Concordia is Carnival's European brand, which represents 16% of fleetwide capacity. Carnival's European itineraries account for roughly 32% of its 2012 capacity, says Rothman. So the Italian tragedy that crippled the Concordia could be very damaging to Carnival’s bottom line.
But the contrarian's question is, with the big decline in the two cruise-line companies stocks, are they now opportunistic buys? The immediate answer would be that it might be best to look elsewhere for real bargains at this time.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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