Carnival shares are cruising despite troubles

Shipwrecks, fires and robbery have plagued the cruise line recently. Yet its stock seems impervious.

By InvestorPlace Mar 5, 2012 10:55AM

Image Source/PhotolibraryBy Beth Gaston Moon

Nearly 100 years ago (April 15, 1912), the RMS Titanic sank on her maiden voyage, resulting in the loss of 1,517 lives. The maritime disaster, one of the worst of its kind, has served as a cautionary tale ever since as a chilling example of hubris.


On the business front, the vessel's owner, White Star Line, managed to stay afloat despite this high-profile tragedy and the Great Depression that followed. White Star later merged with Royal Mail Steam Packet Company in 1927 and still operates today as a subsidiary of Cunard. Cunard is a British-based division of Carnival (CCL), which has been in the news for some recent disasters of its own, though thankfully none of Titanic proportions. The worst incident was the recent partial sinking of the Costa Concordia passenger liner, which claimed at least 25 lives. 


Last week, a fire broke out on another of Carnival's Italian liners, the Costa Allegra. And 22 Carnival Splendor passengers were recently robbed after the ship docked in Puerto Vallarta. Then, two vessels in the company's British fleet were turned away from an Argentinian port due to a dispute between the countries.


The hits just keep on coming, yet the stock seems impervious. For one thing, the ultimate economic impact of these troubles is slight. The Concordia will be out of commission through late November, resulting in earnings losses of up to $95 million -- no small potatoes, but this figure accounts for only about 7% of Carnival's quarterly net earnings and 0.5% of the company's $18 billion market cap.


Another reason the impact on the stock could be negligible is that Carnival passengers (or surviving family members of passengers) wishing to sue the line will discover that the company's pockets are far from bottomless. According to a recent Reuters story, "cruise industry officials say their contracts [which lay out rules for seeking redress] streamline the litigation process, prevent frivolous claims and lower cruise costs for passengers."


Additionally, cruise bookings continue to climb even amid the global economic contraction. From 2008 through 2012, the number of total passengers aboard the world's cruise ships rose more than 30% and is expected to keep growing through 2015.


CCL shares have lost about 11% since the Jan. 13 Concordia disaster but are still perched near round-number support around the $30 level. This area has contained pullbacks in the shares going back to late 2009. Some chartists might even say this pullback provides a buying opportunity (though more conservative investors might want to wait for the company's next earnings report on or around March 23).

For the upcoming first quarter, analysts are expecting CCL to report a per-share loss of a penny, compared to year-ago earnings of 19 cents per share.


What about Carnival's main rival, Royal Caribbean (RCL)? Its shares have been virtually flat since Jan. 13 and have outperformed CCL over the past six months. For 2012, RCL is expected to have roughly 24% of the market, versus 49% for CCL. Investors who expect to see a shift away from CCL to alternatives could consider a paired trade (a short strategy in Carnival and a long strategy in RCL), but so far there's no demonstrated evidence of such a trend.


If White Star can weather a sinking that kills more than 1,500 people (including John Jacob Astor IV, Isidor and Ida Strauss, and other prominent businesspeople), Carnival's recent foibles could end up being a mere blip on the company's long-term radar.


Find out why, after the Costa Concordia disaster, now may be the perfect time to book a cruise.


As of this writing, Beth Gaston Moon does not own any shares mentioned here.


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