One of the most basic principles of technical analysis is the identification of trends. Trends can last very short periods of time of just a few weeks at a time, or they can extend into several months or even into years. One of the most important elements of trend analysis is the simple fact that all trends, no matter what direction they are currently moving, inevitably reverse and go the opposite direction. When those reversals will happen is the great unknown, the question that defies a single answer or definition that always works every time. The longer a trend runs in a certain direction, the more likely it becomes to stage a move back in the opposite direction.
Another interesting phenomenon of trends is that before those reversals happen, there is often a “last gasp” surge in the same direction of that longer trend. For the broad market, most of 2018 marked a pause of its nearly ten-year bullish run, with the latter part of the year and its first major correction in years setting the stage for what a lot of people thought could have been a reversal into a new bear market. Instead, the market moved into a fresh new rally at the beginning of this year that has just recently seen it push to a new all-time high.
That rally has been fed by indications that the U.S. economy remains healthy, with renewed expectations of a resolution of trade concerns as well as that the Fed will remain accommodative in its approach to interest rates. Low unemployment and rising wages add to that positive expectation. That generally should translate to positive news for stocks in the Consumer Discretionary sector, who tend to see their best results when consumers feel confident not only about the broad economy but also their own personal prospects.
One of the most economically sensitive segments of this sector comes from the Leisure industry. That includes stocks like Carnival Corp (CCL), which despite being up about 11% so far this year is still more than 20% below its 2018 high. The fundamental profile for the company is pretty solid, with an attractive dividend and generally healthy operating margins. Is the value proposition good enough to match? Let’s find out.
Fundamental and Value Profile
Carnival Corporation is a leisure travel company. The Company is a cruise company of global cruise guests, and a provider of vacations to all cruise destinations throughout the world. The Company operates in four segments: North America, EAA, Cruise Support and, Tour and Other. The Company’s North America segment includes Carnival Cruise Line, Holland America Line, Princess Cruises (Princess) and Seabourn. The Company’s Cruise Support segment represents certain of its port and related facilities and other services that are provided for the benefit of its cruise brands and Fathom’s selling, general and administrative expenses. Its EAA segment includes AIDA Cruises (AIDA), Costa Cruises (Costa), Cunard, P&O Cruises (Australia), P&O Cruises (the United Kingdom) and ship operations of Fathom. Its Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and three ships that the Company bareboat charter to unaffiliated entities. CCL has a current market cap of about $28.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings have declined by about -6%, while revenues increased about 10.5%. The company’s margin profile shows that Net Income as a percentage of Revenues over the last twelve months was a very healthy 16%, but dropped in the last quarter to a little over 7%. The decline is a red flag, but remains mostly healthy.
Free Cash Flow: CCL’s free cash flow is adequate, at about $686 million. This is a number that declined from about $2.2 billion in the fourth quarter of 2018.
Debt/Equity: The company’s Debt/Equity ratio is a bit misleading; .38 is a generally low number, but CCL’s balance sheet shows only $649 million in cash and liquid assets against more than $9 billion in long-term debt. That, along with their deteriorating Net Income, implies they could have liquidity issues in the future.
Dividend: CCL’s annual divided is $2.00 per share and translates to a yield of 3.67% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CCL is $46 and translates to a Price/Book ratio of 1.19 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.72, which puts a target price for the stock at nearly $95 per share. That’s more than 70% above the stock’s current price, and is more than $20 above its 2018 highs; but the stock is also about 54% below its historical Price/Cash Flow ratio, which offers a somewhat lower, but still impressive target price at around $85.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock has seen quite a bit of volatility since August of last year, with a 52-week low around $45.50, from which the stock rallied to a short-term high around $59. At the beginning of April the stock pivoted higher off of a low around $50, and has recently broken above the 38.2% retracement line at around $54. The next most likely resistance is at the 50% retracement line around $56.66.
Near-term Keys: A break above resistance to $57 could offer an interesting short-term trade by buying the stock or working with call options, with a near-term target between the $59 and $60. If the stock drops below the 38.2% retracement line, that would mark a break below support and could see more room to drop to around $50. That could be an interesting signal to short the stock or to work with put options. What about the value proposition? The valuation metrics are very interesting; but the deterioration in the company’s Net Income, declining Free Cash Flow, and weak liquidity make it hard to justify a long-term position right now. I would prefer to see improvement in all three numbers first – even if it means seeing the stock increase in price from its current level along the way.