Head to Head: Carnival vs. TUI Travel

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LONDON -- In this series, some of your favorite FTSE 100 shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, they'll duke it out on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up the most points at the end of the contest.

Stepping into the ring today are cruise operator Carnival (LSE: CCL.L) and package tour firm TUI Travel (LSE: TT.L) , the latter being ranked just outside the FTSE 100 at number 105.

Carnival and TUI Travel have outperformed the market over the last six months. The FTSE 100 is down 1% over the period. Carnival's shares have risen 12%, recovering strongly from their dive following the sinking of the company's Costa Concordia ship in January. TUI Travel's shares have soared 20% over the period -- and 37% in the last three months -- on the back of improving trading and director confidence.

Let's take our seats at ringside.

Round 1: earnings

 

Carnival

TUI Travel

Recent share price (pence)

2,276

233

Last-year P/E ratio

14.8

9.9

Current-year forecast P/E

19.3

9.9

Four-year EPS CAGR

(5%)

13%

Current-year forecast EPS growth

(24%)

0%

Operating margin

14%

2%

Sources: Digital Look, Morningstar, company reports. CAGR = compound annual growth rate. Winning metrics in bold.

TUI Travel wins the first round comfortably, taking four out of the five points. It's worth noting, though, that TUI's four-year CAGR starts in the year of its merger with First Choice, when the company changed its financial year-end. Such changes can make a bit of a mess of the numbers.

The 13% CAGR in the table is based on TUI's own pro forma EPS figure; Morningstar's independent analysts arrived at a figure that gives a four-year CAGR of -1%! That still beats Carnival, however. On a less problematic three-year basis, TUI's CAGR is 5%, which actually matches the dividend CAGR over the same period.

What we can say, looking at all the EPS growth numbers, is that even the biggest and best firms operating in markets driven by discretionary consumer spending really struggle in tough economic times.

Round 2: Dividends

 

Carnival

TUI Travel

Last-year dividend yield

2.7%

4.8%

Current-year forecast dividend yield

2.7%

5%

Four-year dividend CAGR

(8%)

8%

Current-year forecast dividend growth

0%

4%

Forecast dividend cover

1.9

2

Sources: Digital Look, Morningstar, company reports. CAGR = compound annual growth rate. Winning metrics in bold.

TUI crushes Carnival in the second round, the latter failing to muster a single point. The cruise ship operator came close on forecast dividend cover, but that's scant consolation. TUI's four-year dividend CAGR, like its EPS CAGR, is a little problematic because the company changed its financial year-end at the start of the period. As noted previously, the three-year dividend CAGR is 5%, in line with earnings.

Round 3: Balance sheet

 

Carnival

TUI Travel

Price-to-book ratio

1.6

1.3

Net gearing (%)

37

0

Sources: Digital Look, Morningstar, company reports. Winning metrics in bold.

TUI does the business again, cruising to victory in the final round. This is the most one-sided contest we've seen to date in the "Head to Head" series -- and it's hard to imagine another company being defeated as heavily as Carnival in the future. TUI won all three rounds and ran up 11 points to Carnival's one.

Post-match assessment
TUI and Carnival both updated the market last week on recent trading, confirmed they're on track to meet this year's market expectations, and made quite bullish noises on the outlook for next year.

Why should there be such a gulf between the two companies, with Carnival on a very rich rating and TUI at the value end of the scale? After all, these firms are both in the travel and leisure sector, relying on discretionary consumer spending by cash-strapped consumers.

Part of the answer may be in the one point Carnival did manage to muster in the contest -- the point it scored for its superior operating margin: 14%, versus TUI's 2%.

Carnival's margin suggests it is in a healthy position in a not-overly-competitive cruise ship market. In contrast, package tour operators are notorious for going bust in recessions because they're in a competitive market and are particularly vulnerable on account of their wafer-thin margins. Many operators have, in fact, gone to the wall in the latest recession. Now that some green shoots of recovery seem to be appearing in the sector, investors look like they're ready to recognize TUI's strong position -- at least, that's what the recently soaring share price suggests.

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