CCL: take a cruise with a great value stock

August 20, 2018

CCL: take a cruise with a great value stock

Last week, I wrote about Royal Caribbean Cruises (RCL), which has been setting up what looks like a nice value-based opportunity. Today I’m highlighting another stock in the same industry, and one of RCL’s direct competitors, for practically the same reason. Carnival Corporation (CCL) may actually be a better opportunity than RCL for some investors. Based in London, CCL is a bigger company than RCL, with a market cap at around $32 billion, trading at a lower stock price. Like RCL and many stocks in the Leisure & Recreation Services industry, CCL has dropped from a high in late January, but since the beginning of July has begun to show some bullish strength.

Another factor that can play into CCL’s favor isn’t just its status as a large-cap stock; it also has a very strong fundamental profile, with healthy profit margins, manageable and conservative debt management, and healthy cash flows. More importantly, the value proposition for the stock is very attractive right now. I’ve speculated that the market could be setting up for yet another extension of its long-term trend – what is usually seen as the “last gasp” push before the market finally begins to turn back into legitimate bear market territory. 

The catch to that opinion is that there is no way to really know when the turn will happen, and those “last gasp” rallies can last as little as a few weeks to several months. If this next rally does materialize, there could still be plenty of upside potential to capture. You want to be selective about what stocks you’re working with, and very conservative about how much of your capital you’re putting into any single position, because at this stage risk management is becoming more and more important every day. That said, CCL is a stock that is worth taking a serious look, and might be a great stock to work with.



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 $32 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings have grown almost 31%, while revenues increased about 10.5%. The company’s margin profile shows that Net Income as a percentage of Revenues dropped somewhat from a little over 15% over the last twelve months to almost 13% in the last quarter. That’s not insignificant, but contrasted against the rest of the data we’ll look at, I don’t believe it is a major cause for concern.
  • Free Cash Flow: CCL’s free cash flow is healthy, at more than $2.3 billion. This is a number that has been relatively stable, yet rising slightly, since the second quarter of 2016 from around $2 billion.
  • Dividend: CCL’s annual divided is $2.00 per share and translates to a yield of 3.30% 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 $45.10 and translates to a Price/Book ratio of 1.34 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.62, which puts a target price for the stock at about $73 per share, or about 20% higher than its current price. It’s also worth noting that Book Value has increased steadily since the first quarter of 2016, despite its slight drop in the last quarter from $45.65. Another element supporting CCL’s undervalued argument is its Price/Cash Flow ratio, which is currently 23% below its historical average. That puts the stock’s target price a little above $74.



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 longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s downward trend dates back to January after the stock hit a 52-week high at around $73 per share. The stock is in a strong downward trend from that point, finding a trend low in July at around $56 per share. That’s a total decline up to that point of about 23%, and is one of the first technical indications that while the stock remains much higher than when it started at in 2009 when this bull market started, it could be setting up a nice value play now. The stock’s rally to around $60 as of this writing is evidence the stock’s current downward trend looks set to reverse.
  • Near-term Keys: A break above resistance around $62.50, marked by the 38.2% retracement line would provide good validation that trend reversal is happening, with a good chance of seeing the stock retest its 52-week high around $73 per share. A bullish investor should wait for that break to get in, either by buying the stock outright or by using call options. If the stock breaks below trend support around $56, however, you can assume that the downward trend will continue for the foreseeable future. In that case, the stock could easily drop near to its 2-year lows between $42 and $46 per share – levels last seen in 2016 prior to last year’s extended rally.