Why Invest in Carnival When You Can Buy Disney?

Source: Disney

Even though it reported better-than-expected revenue and earnings for the second quarter of its 2014 fiscal year on Jun. 24, shares of Carnival Corporation fell 3% to close at $38.23. Instead of focusing on the immediate results, Mr. Market paid more attention to the company's outlook for its third quarter, which paints a mildly negative picture for the cruise ship operator. In light of these developments, some investors are probably wondering what kind of action to take, but the fact of the matter is that the best shipping play might be one you never expected, The Walt Disney Company .

Carnival beat on the top and the bottom decks!
For the quarter, Carnival reported revenue of $3.63 billion. This beat the $3.61 billion expected by analysts as the company's top line came in 4% above its $3.48 billion in revenue for the same quarter last year. While the company saw its passenger revenue climb, its onboard and other category showed the fastest sales growth as its revenue jumped 8% from $839 million to $905 million.

From a profitability standpoint, Carnival's metrics were even more impressive. For the quarter, the company reported earnings per share of $0.14. This greatly exceeded the $0.02 per share expected by analysts and it came in above the $0.05 per share that management reported in last year's quarter. This partially resulted from the company's rising revenue, but bigger contributions came from Carnival's cruise expenses, which fell from 71.5% of sales to 70.6%, and a $42 million swing in the value of fuel derivative contracts.

 ActualForecastLast Year's
Revenue (in billions)$3.63$3.61$3.48
Earnings per Share$0.14$0.02$0.05

Source: Yahoo! Finance

Going into the third quarter, Carnival's management team expects revenue to come in higher than it did in last year's quarter with earnings per share of $1.38-$1.44, compared to the $1.51 expected by analysts and the $1.38 reported in last year's third quarter. This shortfall in profitability is likely what has shareholders worried the most, but the general uptrend that management forecast going forward suggests the cruise ship industry has brighter days ahead of it. This outlook will also prove to be promising for Disney, an interesting player in the market.

Disney's cruising to success!
Currently, Disney Cruise Line, a part of the company's parks and resorts segment, owns four cruise ships: Disney Magic, Disney Wonder, Disney Dream, and Disney Fantasy. Both Disney Magic and Disney Wonder are 85,000 ton, 877 stateroom ships launched in the late 1990's. Its other two cruise ships are a bit larger, weighing 130,000 tons and possessing 1,250 staterooms. These larger vessels don't differ too much in size from the Carnival Vista, Carnival's newest ship with a 2016 expected delivery at 135,000 tons of cruising fun.

Between 2011 and 2013, Disney's parks and resorts segment saw its revenue climb 19% from $11.8 billion to $14.1 billion. Although Disney does not disclose financial or volume data specifically geared toward its Disney Cruise Line operations, it attributed the increase in revenue from this segment, in part, to higher attendance stemming from higher cruise ship days. It attributed the rise in cruise ship days, for the most part, to the launch of its Disney Dream and Disney Fantasy in 2011 and 2012, respectively.

Source: Disney

While the company's operations in the seafaring business are small when placed next to the 101-ship fleet that makes up Carnival, it does have control over a private island called Castaway Cay. With a 99-year lease over the land from the Bahamian government, Disney has a good level of control over the island that allows it to operate as it deems fit.

It's worth mentioning that Carnival also has an island of its own called Half Moon Bay, as well as a piece of Eleuthera under lease. However, given the size disparity between Disney's fleet and that of Carnival, Disney's ability to scale up its fleet with Castaway Cay as the destination in mind implies some good upside for Disney Cruise Line in the future.

Foolish takeaway
Despite a mediocre outlook, Carnival performed impressively in the past quarter and the company's size suggests that the business could have a very bright future. However, the best upside for investors looking to grab a piece of the cruise industry might come from Disney. Yes, the company does have a small fleet, but with traffic growing and the ability to scale up as time goes on, Disney (through its Disney Cruise Line) might be the best way to play a growing market.

Disney is just one of the companies fighting a war for your living room
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The article Why Invest in Carnival When You Can Buy Disney? originally appeared on Fool.com.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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