Analysts Hike Carnival Valuation

Following the firm's recent guidance, Morningstar's analyst has reviewed her forecasts for Carnival and raised her valuation by 12%

Jaime M. Katz, CFA 31 March, 2015 | 4:31PM
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We are raising our fair value estimate of Carnival (CCL) shares to 3,431p because of updated guidance from the company, which for the full year included weaker current currency yields (due to foreign exchange headwinds) and better cost leverage than previously anticipated (particularly related to fuel). While second-quarter expenses are expected to tick up due to project spending causing more dry dock days, lower fuel prices are offsetting these costs, helping to generate strong free cash flow at the enterprise level.

Our fair value estimate implies a fiscal 2015 price/earnings ratio of 20 times and an enterprise value/EBITDA multiple of 13 times. This is versus a historical five-year median P/E of 19 times and an EV/EBITDA multiple of 11 times.

We expect that as supply/demand characteristics shift over time, increases in pricing should help Carnival. We believe pricing can grow in the low-single digits over the medium term (although we forecast them to fall 4% in 2015 current currency) as capacity growth remains under 5% annually over the next decade. In addition to slower capacity growth, we expect occupancy rates of 102%, which is slightly lower than historical rates, as we expect the firm to hold pricing firm (sacrificing some occupancy). Longer-term, we see pricing and costs stabilising at a low-single-digit rate, as the cruise industry remains in a stable phase of its life cycle with rational competition.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carnival PLC1,683.20 GBX2.35Rating

About Author

Jaime M. Katz, CFA  is an equity analyst for Morningstar, covering leisure and travel and retail.

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