Why Carnival Will Never Be Great Again

Carnival Costa Concordia
Carnival Costa Concordia

It's now been two weeks since Carnival's (CCL) tragic Costa Concordia accident off the Tuscan coast of Italy.

After refuting reports that the leading cruise line operator was insensitively offering survivors a 30% discount on a future Costa cruise, Carnival came up with a public offer to those who found themselves on the unfortunate voyage.

Carnival will shell out the euro equivalent of $14,460 to compensate every surviving passenger to cover the lost baggage and psychological trauma.

I won't opine about whether that's fair compensation. Every passenger is unique. Considering the lavish accessories and clothing that many ritzy travelers bring alone on a formal Mediterranean cruise, I'm sure that won't even be enough to cover the valuables lost by some of the passengers. They'll sue. Others will take the money and run.

My concern here is with Carnival as an investment at this point.

Not-So-Bon Voyage

Cruising is awesome. Cruising is safe. Potential passengers should disregard this tragedy. If anything, we now have a cautionary tale for any captain to avoid veering off course for whatever reason. Taking a cruise was already a generally safe travel option, and now it will be even safer.

I even recently argued how the catastrophic Concordia mishap makes this the best time to get a great deal on a future cruise.

What remains to be seen is the Costa brand itself can survive.

This is a global news story that travelers won't soon forget. It obviously can't match the Titantic. It may not even be as memorable as the hijacked Achille Lauro. However, the Costa name will forever be linked to the Concordia accident despite decades of brand building.

Thankfully for Carnival, it's a company with many different brands.

The namesake brand is more than familiar closer to home. It's the cheap "fun ship" cruise line for first-time passengers or cost-conscious consumers. Then there are the classier brands in Carnival's arsenal, like Holland America and Seabourn. Its Princess line was immortalized by The Love Boat. Overseas -- literally -- Carnival's fleet includes P&O Cruises, Cunard, and AIDA. If it must nix the Costa brand, it has no shortage of alternatives.

Ports of Fall

Despite Carnival's industry-defining depth of vessels, there's still something missing. Disney (DIS) has doubled its fleet to four ships since last year, and it obviously has the market cornered on premium cruising for young families. Larger rival Royal Caribbean (RCL) turned heads by wooing families with older kids by installing rock walls aboard its ships, and these days its newer boats offer zip lines and surfing simulators. Norwegian Cruise Lines -- which filed initial paperwork to go public last year -- attracts sophisticated cruise veterans who appreciate its less rigid "freestyle cruising" approach, which means passengers don't have to eat at a particular restaurant at a particular time.

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How far do you think Carnival can go on its "fun ship" theme?

The company's flagship brand is the Walmart of cruising. It's the biggest. It's usually the cheapest. This may not necessarily be a bad place to be during a period when cruise lines are growing their fleets and expanding into new ports that will attract even more first-time cruisers; however, investors may be better served by focusing on a smaller rival with a more fine-tuned marketing focus.

Investors comparing Royal Caribbean and Carnival as potential investments may be surprised.

Let's check what analysts think. Wall Street predicts Carnival will grow its revenue by a little more than 1% to $16 billion this year. They see earnings of $2.36 a share, shrinking slightly from last year's $2.44-a-share showing.

Now let's try Royal Caribbean on for size. Analysts are forecasting revenue to grow by nearly 4%. They see net income of $2.98 a share, well ahead of the $2.75 a share it posted in 2011.

Mr. Market is no dummy. If a stock is growing faster, it's the one that will command the higher valuation. Except that's not the case here. Carnival is trading at 13 times this year's projected profitability. Royal Caribbean checks in at a more reasonable nine times this year's earnings target.

The Open Seas

One of the four reasons that I offered for locking into a cruise booking now is that fuel prices are projected to move higher. Some analysts believe that retail gas prices may approach 2008's peak, and that increase will likely be mirrored across all modes of transportation outside of you pedaling a bike to work.

Cruise lines can slap on fuel surcharges when things get out of hand, but the easier solution is to juice up room rates. But it'll be hard for the industry to raise prices in the near term with the Concordia tragedy fresh in the mind of consumers.
What do you think that will do to margins?

Analysts are already talking down Carnival's prospects. Just three months ago, the pros were modeling a profit of $2.83 a share this year and $3.29 a share come fiscal 2013. Now, as I noted above, they foresee net income of $2.36 a share in 2012 and $2.79 a share next year.

If consumer demand doesn't keep up with the way that cruise lines have been rolling more and bigger ships out of shipyards, there are going to be price wars and shakeouts in the future.

Living in Miami, I have nothing but respect for the Arison family, which runs Carnival, and for my many neighbors who have helped build it into the world's largest cruise ship operator. However, the stock's lofty valuation and near-term deterioration of its fundamentals are difficult to ignore.

Are you still sure you want to go on this Carnival ride, investors?

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, except for Disney. Motley Fool newsletter services have recommended buying shares of Disney.

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