Investment Jungle

Having just returned from a holiday cruise on a Carnival Fun Ship, what better way to get back into our Rule #1 stock analysis by looking at Carnival Corporation which trades on the NYSE under the symbol CCL.

You might think that a ‘Fun Ship’ would be overflowing with young people looking to party on a floating hotel. But you would be surprised. In fact, the ship seems to be more of a floating retirement home! This company just might be a great way to play the aging North American population.

Let’s get back in the groove and see if this stock is worthy of being considered a Rule #1 stock!

Company Profile:

From Yahoo Finance

Carnival Corporation operates as a cruise and vacation company. The company also markets and operates hotels or lodges in Alaska and the Yukon Territory of Canada; motorcoaches for sightseeing and charters in Washington, Alaska, and the Canadian Yukon Territory and the Canadian province of British Columbia; domed rail cars, which are run on the Alaska Railroad between Anchorage and Fairbanks, Whittier and Denali, and Whittier and Talkeetna; day boats in Alaska and on the Yukon River; and sightseeing packages. As of January 29, 2008, it operated 85 cruise ships with 158,352 passenger capacity in North America, Europe, Australia, and New Zealand. The company was founded in 1974 and is headquartered in Miami, Florida.

Market capitalization is $34.15B.

Fundamental Analysis:

Let’s have a look at the Big Five and see if this company has established a moat.

So how has management performed? Rule #1 investors look at the return on invested capital to judge management. Rule #1 investors also demand a minimum of 10% per year over the last 10 years. Unfortunately, management has not attained that desired return, although it has remained quite close. Clearly, the ROIC has been dropping from the loftier days in 1998-1999 of 15% down to the current 9.2%. However, management has been fairly consistent in staying close to the 10% minimum. The 5 year average ROIC comes in at a disappointing 8.60% (mostly hampered by the subpar ROIC in 2003 of 5.8%).

Return on equity has also been declining. The 10 year average ROE comes in at 13.87%. The 5 year average ROE drops to 11.55%. Debt currently makes up 30.7% of capital.

Equity growth rates have also been declining. The 9 year average equity growth rate is a decent 15.02%. That slips to 13.39% over 5 years and further declines to 9.01% over 3 years. Last year’s equity growth rate came in at 10.6%. Once again, this company seems to want to sit at the 10% mark.

Earnings per share growth rate has been a bit more volatile. The 9 year average EPS growth rate is 8.81%. The 5 year rate jumps up to 13.29%. But its all down hill from there. The 3 year rate falls to 8.77%. And last year’s EPS growth rate was a mere 6.12%.

Sales growth rates are not immune to this trend. The 9 year rate comes in at a whopping 19.82%. The 5 year rate increases to 23.18%. Unfortunately, the 3 year rate plummets to 9.89%. And last year’s rate stayed steady at 10.09%.

Cash flow growth rates are no different (and would we expect them to be?). The 9 year rate is 11.38%. The 5 year rate increases to 15.93%. The 3 year rate comes down to 9.42%. And last year’s cash flow growth rate was 7.96%.

Unfortunately, CCL does not exhibit the characteristics of a Rule #1 stock. However, it does seem to have stabilized into its current performance numbers.

Stock Analysis:

If you are still interested in owning this company, let’s calculate the sticker price.

For my future EPS growth rate, I chose 9.01%. This is the 3 year equity growth rate and seems to be in line with the last few years. Analysts have forecast 15%. That is significantly higher but I think too optimistic. I will stick with my 9.01% EPS growth rate.

The P/E has been compressing over the years. The 10 year average P/E is 19.11. The 5 year drops to 17.75. And the current P/E is 13.88. The default P/E (which is just twice the future EPS growth rate) would be 18.02. I will use the 5 year average P/E of 17.75 which is in line with our future EPS growth rate.

With this information, the sticker price works out to $30.57. At the current price of $40.81, Mr. Market is demanding a premium of 33.52%! Too rich for my blood.

Here is my Rule #1 analysis of CCL.

Here is the 1 year stock price chart:

Quite the choppy looking graph. The company has definitely had a nice run from its recent lows, but seems to be headed right back there.

Conclusion:

Hoping to find a long term play on the aging population, I thought it would be interesting to have a look at Carnival Corporation and its ‘Fun Ships.’ It does not exhibit the characteristics of a Rule #1 stock.

And unfortunately, it is not selling at an attractive price.

But it was a fun vacation!

Full Disclosure: I do not own shares in CCL.

Popularity: 98%