Carnival – choppy waters Premium

Several of Carnival’s important brands have faced rough seas in the past year or two, and they continue to struggle. The company’s third-quarter results showed that it is not steaming ahead operationally, either. And yet investors are still paying the full fare for Carnival’s shares. The 7 per cent shaved off the share price on Tuesday may not be enough.

Carnival operates the cruise line that owned the Costa Concordia, which ran aground off the Italian coast in 2012, resulting in 32 deaths and the trial of the captain for manslaughter and abandoning ship. In February an engine-room fire on the Carnival Triumph left 3,000 passengers stranded, in a highly publicised embarrassment.

None of this makes one want to book a cruise. Indeed, bookings for the rest of this year and the first half of 2014 are running behind the previous year. Other headwinds include the tough economy in southern Europe and political tensions in the eastern Mediterranean. The company expects declines in net revenue yields – a measure of net revenue per berth – for the full year 2013 and into 2014. Costs, excluding fuel, are rising, driven by measures meant to entice customers, such as marketing, onboard food and entertainment.

Yes, ageing populations bode well for the cruise industry, and Carnival is pushing hard into Asia, opening five new sales offices in China in the last quarter. While admitting that it would take up to three years to recover fully from the Concordia tragedy, Carnival chairman Micky Arison is optimistic that the brand will eventually recover.

But at $35, the stock is trading at about 16 times forward earnings – in line with historical averages going back 10 years. A beat-up brand and operational declines would merit a discount in a less exuberant market. When the mood changes, Carnival investors will be heading ashore.

Email the Lex team in confidence at lex@ft.com

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