This 'Hated' Tourism Stock Offers 25% Upside

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Market overreactions provide great buying opportunities -- especially when they happen to large, consistently profitable companies. 

It happened to BP (NYSE: BP) back in 2011 with the Deepwater Horizon incident. Recalls have sent shares of Boeing (NYSE: BA), Toyota (NYSE: TM), and Tyson (NYSE: TSN) tumbling at one point or another. 

And sometimes it takes years before a company can fully wash the stain from its brand image. But for time-tested companies, these sell-offs have been great buying opportunities.

Unforeseen incidents and adverse events can happen almost anywhere -- including at sea. And it's safe to say Carnival Corp. (NYSE: CCL) has had its fair share of adverse events over the past couple years. 

First, there was the Costa Concordia shipwreck that killed 32 people in 2012. Then, last year, the Carnival Triumph incident left passengers stranded for days in the Gulf of Mexico. Most recently, the Caribbean Princess had to return to its Houston port when 176 passengers became ill.

Needless to say, this combination of events has left shares of Carnival underperforming the market. The cruise operator has lagged the S&P 500 by nearly 30 percentage points over the past three years. 

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New CEO, New Image? 
Arnold Donald was appointed CEO last year after serving on the company's board of directors for over a dozen years. He takes over for Chairman Micky Arison, whose family remains the company's largest shareholder with a 29% stake. Donald's plan is to bring a fresh perspective to the company in terms of marketing and costs. But his main goal is to rebuild the company's image.


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  Carnival's rebranding efforts are working. Annual sales are back up near decade highs. In the first quarter of this year, the company posted record booking volumes.  

Carnival launched a new strategy toward the end of last year to help with its rebranding -- and so far, the strategy is working. Annual sales are back up near decade highs. In the first quarter of this year, Carnival posted record booking volumes.

One aspect of the marketing strategy has been to appeal to rookie cruisers, people who have never been on a cruise. Over half of Carnival's cruises are five days or less, and that relatively brief cruise time is a positive for first-time cruisers. 

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Furthermore, half of the U.S. population is within five hours of a Carnival port. This close proximity, coupled with its short cruise times, appeals to many cost-conscious Americans. 

Other Opportunities
Outside of fuel and payroll, Carnival spent $6 billion on other expenses. Part of the problem is that the company's various brands are operating independently. Marketing and purchasing costs could be consolidated into a central purchasing system. By coordinating expenses, Carnival has a big opportunity to boost its margins and net earnings.

Compared with other cruise operators, Carnival offers investors the greatest exposure to the European market. Over 30% of Carnival's capacity is exposed to Europe. The company's core brands in Europe include Costa and P&O.

With Europe having been in recession for the past couple of years, there is pent-up demand among cruise-goers to begin traveling again. Carnival's year-to-date booking volumes are already posting year-over-year gains, which bodes well for the company's remaining rooms. Given the strong demand, Carnival can raise prices on rooms that haven't yet been booked.

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Even after its high-profile struggles, Carnival's current dividend yield is 2.7%. That's above major peers, including Norwegian Cruise Line (Nasdaq: NCLH) and Royal Caribbean Cruises (NYSE: RCL). Carnival also trades at a forward price-to-earnings (P/E) ratio under 16; its historical average P/E is closer to 20. However, given the company's growth opportunities, and the fact that it's slowly rehabilitating its brand, Carnival could easily trade closer to its historical average over the next couple years. 

Risks to Consider: Another high-profile incident would be yet another stain on the Carnival brand. Cruise travel is also dependent on the labor market and a strengthening economy. An economic downturn would have a serious hurdle for Carnival.

Action to Take --> Buy Carnival for upside to $47. Based on 2015 earnings expectations of $2.34, and assuming Carnival deserves to trade closer to its historical P/E, the upside is over 25%. 

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