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Carnival After the Costa Concordia Disaster, Buy, Sell or Hold?

Companies / Corporate News Feb 02, 2012 - 11:10 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJack Barne writes: Carnival Corp. (NYSE: CCL) is the world's largest provider of vacation cruises operating under the names Carnival Cruise Lines, Holland America Line, Princess Cruises, and Seabourn in North America; and AIDA Cruises, Costa Cruises, Cunard, Ibero Cruises, and P&O Cruises in Europe, Australia, and Asia.

As you know, Carnival has been all over the news lately because of the deadly sinking in Italy, when the Costa Concordia suffered one of the largest cruise ship accidents in decades.

Since then, Carnival Corp. shareholders have taken some steep losses. Shares are down nearly 12%.

For investors, that leaves the question of what will happen to Carnival Corp. in the wake of the tragedy.

However, from strictly a business standpoint what investors need to know is that the ship is fully insured and at this stage it is the reinsurance firms that will have to fund the refloating and fixing costs.

So as tragic as the disaster has been, Carnival Corp. will survive.

According to a Carnival Corp. release, "the impact to 2012 earnings for loss of use is expected to be approximately $85-$95 million or $0.11-$0.12 per share."

The larger concern, as management admits in the very next sentence of the release, is that "the company anticipates other costs to the business that are not possible to determine at this time." (Full release)

So our problem here in deciding whether to buy, sell, or hold CLL are the after-effects of the accident, such as whether or not people will decide to book vacations on any of Carnival's brands.

More importantly, we won't be able to measure year-over-year comparisons for first quarter bookings until quarter end, and we won't be able to tease the bookings data for quarters two, three, and four for almost a year, when full data will be available.

However, while the company is probably going to be looking at a slower-than-expected year, I believe insurance and the diversity of assets make the Costa Concordia disaster a unique one-off event.

As a result, it's time to "Hold" Carnival Corp. (**).

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Key Points
Some quick notes about Carnival Corp.:

•It's the world's largest cruise provider.
•It has $5.3 billion in gross profits.
•And the stock yields 3.2%.

Carnival has grown into the largest cruise operator in the world, with an estimated 98 operating ships. The diversity of its assets and mix of ship sizes all point to a well-balanced business model that should allow CCL to weather the tragedy.

The company pays out $1.00 per share in dividends, which in this global economic environment, is hard to find.

The company reported $5.3 billion dollars in gross profits over the trailing twelve months on $15.79 billion in revenue. It showed $3.7 billion in EBITDA (Earnings Before Interest, Taxes, Depreciation & Adjustments) over the same time period.

I believe with the stock down 32% over the last 52 weeks, the worst has been priced in. The actual drop was about 14% at the time of the announcement, and it has already bounced back 8% or so.

Carnival Corp. was founded in 1974 and is headquartered in Miami. The company has a market capitalization of $24.5 billion with an enterprise value of $33.4 billion, once net debt and cash levels are taken into consideration.

Action to Take: "Hold" Carnival Corporation (NYSE: CCL) (**) While the crash and death of passengers is always a worst-case scenario for cruise line operators, the reality is the ship involved was insured and will most likely be returned to service in 2013.

The stock price is down by 32% in the last year, while the Standard & Poor's 500 Index in the same period is up 1.9%. The stock yields 3.2%, or $1.00 per share.

The implications of this event are such that I believe the damage is already built into the stock, and it's time to give the company a chance to stabilize and start to move up from here.

I would not be looking to increase exposure, but at this point I would not be looking to lower exposure, either. A covered call strategy, written quarterly, could help produce an increased cash flow from these shares, helping to erase the last year in Carnival results.

(**) Special Note of Disclosure: Jack Barnes has no interest in Carnival Corporation (NYSE: CCL).
About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column earlier week, Barnes analyzed Apple Inc. (NYSE: AAPL)


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