Do you know which is the only company who is a member of both the S&P 500 and FTSE 100 indices? Top of the class for those of you would immediately said “Carnival Corporation” (NYSE:CCL). I am not one for the cruises the owner of the P&O Cruises, Costa and Cunard brands offers but judging by the company’s first quarter results issued earlier today I am in a minority.
Carnival (LONDON:CCL) upped its expectation of the growth in year-on-year net revenue yields on a constant currency basis from 2% to 3-4% and noted that their ‘efforts to further elevate our guest experience are clearly resonating with consumers and, notably, improving the frequency and retention of our loyal guests’.
Throw in the benefits from a lower fuel price and an observation from management on their conference call that ‘it is just a matter of time before China becomes the largest cruise market in the world’ and it is hard to conclude anything other than the outlook is good.
Carnival have had to make their own luck however too – after all it has not been that many years since the Costa Concordia and Carnival Triumph debacles. Global foreign exchange movements have also been net unhelpful and whilst the above net revenue yield guidance was given on a constant currency basis sales in their reporting currency of the US dollar fell by 2% year-on-year in their Q1.
Higher realised ticket prices, a careful expansion in capacity plus media campaigns that included a Super Bowl initiative that got a mere 5 billion media impressions before the commercial even aired (and 10 billion impressions in total since) and the launch of a new ship by the Queen all helped. No wonder management are happy to indicate in a comment about current trading that currently ‘we are enjoying a strong wave season’.
As with many thematically strong companies such a profile comes at a price with a forward (financial year ending November 2015) consensus P/E ratio of over x17. The debate for investors with the London listed Carnival share within touching distance of its 2006 high of just over 3400p is how much to extrapolate hope into the future.
For me the key probably rests with shareholder remuneration. Currently the company pays out of a dividend yield of around 2.4% and have a net debt burden of around x2 ebitda. On the conference call management noted that they ‘do see an opportunity to improve shareholder remuneration’ based on the positive trading they are seeing and attractive outlook they are anticipating.
I note that due to the lumpiness of capex spending on new ships and related the company’s free cash flow generation has been a little patchy and how this metric trends is all-critical for building a further expansion in shareholder remuneration and investor confidence alike. At prevailing if you are going to pay up for Carnival shares you need to get comfortable with this aspect.
Despite the good recent trading and expansive future hopes for me risk-reward is better back nearer the 2800p share price level i.e. where the share was at the start of 2015.
In cruising I guess the ideal are becalmed seas but for good stock picking opportunities often you need some rough water. Despite today’s strong update I would be waiting on the sidelines with regard to Carnival’s shares.
Disclaimer: I do not hold any securities mentioned in this article and currently do not have any intention to buy them.