At the beginning of May, I took a long look at Carnival Corp (CCL), the largest cruise operator in the world. At the time, the stock was up about 11% for the year, riding the broader market’s rally to that point to a short-term peak at about $55 that appeared to have the stock positioned to reverse a downward trend that began in October 2018. That didn’t happen; renewed concerns about trade put a temporary lid on the market in May that also forced CCL to drop back and reconfirm its downward trend.
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The Consumer Discretionary sector, which includes Leisure stocks like CCL, dropped through May but rebounded strongly beginning in June as the U.S. and China agreed to resume trade discussions and the Fed indicated its determination to be accommodative to keep the economy growing. That stance even included Fed Chair Jerome Powell signaling during testimony before Congress that a rate cut could come as soon as the next Fed meeting this month.
The market seems as determined as ever to take its queues from Fed monetary policy, which means that while interest rates remain near historically low levels despite previous increases through the end of 2018, the prospect of a gradual tapering of rates is likely to be cheered by investors at large. Whether or not you agree with the decision – it certainly brought out a number of critics as well as defenders within just hours of Mr. Powell’s testimony yesterday – I think the near-term prospect is to give the market a reason to remain mostly bullish for the time being. The question of whether the economy can maintain the “Goldilocks”, not-too-hot and not-too-cold growth that has characterized it to this point remains an open one, but if it does, the Consumer Discretionary sector is one area of the market that should benefit.
While the sector has rebounded nicely, CCL has not only traced back in the direction of its longer trend, it’s actually extended it. In late June, the stock plunged about $5 per share lower on an overnight basis as the market reacted violently to its latest earnings report. My conclusion about the stock’s fundamentals two months ago was that there were signs of problems in the form of a deterioration in Net Income and liquidity that I believed made the stock a risky bet at that time. Two months later, the stock has dropped to a new multiyear low, which seems to confirm my recent opinion. Two months isn’t a lot of time, but with a new earnings report in the background, and a drop in price of almost 20% to boot, it is long enough to warrant another look. Is there a basis to suggest the worst could be over, and that CCL is turning a fundamental corner? Let’s check it 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 $24 billion.
Earnings and Sales Growth: Over the last twelve months, earnings have declined by about -3%, while revenues increased a little over 11%. Those numbers also improved in the last quarter, with earnings growth at about 34.5% and revenue growth 3.53%. The company’s margin profile shows that Net Income as a percentage of Revenues over the last twelve months was a healthy 15%, but dropped in the last quarter to about 9.3%. By comparison, two months ago these number were about 16% on a trailing twelve-month basis and 7% in the prior quarter. The trailing twelve month’s decline isn’t too surprising given the wider difference between the TTM and quarterly numbers two months ago, but the improvement in the quarterly numbers from 7% to 9.3% is encouraging.
Free Cash Flow: CCL’s free cash flow is improving and healthy at $1.35 over the last year. Two months ago, this number was significantly lower, at just about $686 million and that had declined markedly from $2.2 billion at the end 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 about $9 billion in long-term debt. The company’s cash and liquid assets are about $1.2 billion, however, which is a big improvement from just $649 million in cash and liquid assets against in the quarter prior. The improvement in Net Income in the last quarter, along with improving Free Cash Flow and nicely increasing liquidity are all positives that I think provide an interesting counter to the stock’s extended downward trend.
Dividend: CCL’s annual divided is $2.00 per share and translates to a yield of about 4.39% at the stock’s current price. That is impressive and offers another interesting positive element to the stock’s appeal as a long-term, value-based opportunity.
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 $45.75 and translates to a Price/Book ratio of .99 at the stock’s current price. It is true that a quarter ago, the stock’s Book Value was higher, at $46; but framing the current level against the stock’s historical average Price/Book ratio of 1.68 provides a target price for the stock at about $76.50 per share. That’s about 67%% above the stock’s current price, and is within range of its 2018 highs, which is very nice. The stock is also about 83% below its historical Price/Cash Flow ratio, which offers an even more optimistic target price at around $83.
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. Since finding a new multiyear low below $45 in late June, the stock looks like it is using that level as a strong support point, and it could be building a consolidation base around that level. The big overnight gap from earlier in June puts a wide distance between the stock’s current price and the 38.2% Fibonacci retracement line at around $53.50 that I often like to use as a signal point for a technical reversal of a long-term downward trend. In this case, I think a push above that level would likely mark an intermediate upward trend indicator, with a short-term bullish reversal signal at about the midpoint of the June gap, in the $49 per share price area. If the stock’s current support level doesn’t hold, it could test previous pivots in the $39 price range that were last seen around $40 in late 2014.
Near-term Keys: A break above immediate resistance, which is currently around $49 offer bullish trading signal for an aggressive, short-term trader by buying the stock or working with call options, with a near-term target around the $53.50 level marked by the 38.2% retracement line. A push below $45 would mark a new multiyear low, which could be an interesting signal to short the stock or to work with put options. What about the value proposition? The valuation metrics are even more interesting than a couple of months ago, with stabilizing Net Income, improving Free Cash Flow and liquidity make it hard to dismiss the stock’s status as a bargain at its current level. It is true the stock’s long-term downward trend could push the stock even lower; but with an impressive dividend yield and strengthening fundamentals, this could be a stock that is worth being patient with.
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