Messy Stench: Are Cruise Ship Stocks, Riding Low in the Water, a Buy?

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Now that the passengers from Carnival Corp.’s (CCL) smelly and crippled cruise ship Triumph are tired of television interviews, happy talk about the potential for cruise line stocks has begun anew. After all, cruise line shares now are cheap economic recovery plays sporting dividends and a business expected to serve up at least moderate long-term growth. What’s a value investor not to like here? A few things, actually.

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Carnival, as the company that brought about the biggest disasters in the business, sports the biggest bargain in its shares. Carnival shares trade at lower forward PE ratio than Royal Caribbean International (RCL) or Norwegian Cruise Line (NCLH).

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Keep in mind that a lot of companies that rely on consumers having extra spending money have already revved up in recent months. The Vanguard Consumer Discretionary ETF (VCR) is up 9% so far this year while Carnival is down 10% and Royal Caribbean down 8%.

Carnival’s share price was hit in January 2012 when its Costa Concordia cruise sank off the coast of Italy and killed 32 people. They suffered again in February during the Carnival’s Triumph fiasco; a ship full of cruisers adrift for five days at sea with overflowing toilets and lots of cell phone video to publicize the grossness. In March, another Carnival ship was towed back to port with mechanical issues, and yet another ship was delayed by generator and, alas, more toilet issues.

The Concordia incident has faded from attention. Carnival management generally sums up the other incidents by noting that its safety equipment has worked as required, although it will upgrade it to help keep passengers more comfortable in such situations. The chief executive suggested that ordinary mechanical delays are simply getting more media attention at the moment. The company will take an 8-cent to 10-cent earnings hit in the first half of this year mainly from Triumph, but analysts still expect a nearly 10% earnings gain in the current year from last.

At Royal Caribbean, earnings turned to losses last quarter because Europeans, especially in Spain, either couldn’t afford to cruise or the sight of a sinking ship in their midst put them off of it. A nasty stomach virus sickened about 100 passengers on board Royal Caribbean cruise in early March. There have been many of these norovirus outbreaks on cruises ships lately -- 18 since the beginning of last year, according to the CDC, on ships operated by most of the major cruise companies. However, Royal Caribbean is expected to raise earnings by more than 25% this year.

Norwegian Cruise Line went public in January. It’s the growth story of the sector, with 11 ships (Carnival has about 100), and a new ship coming on line each of the next four years. Several investment banks initiated coverage with buy or overweight ratings, including Wells Fargo (WFC), JPMorgan Chase (JPM) and Stifel Nicolaus. As a newcomer to the market, it simply lacks a fundamentals track record and dividends for value investors.

It’s hard to know how much of the recent revenue weakness at Carnival and Royal Caribbean lately was caused by virus worries, safety concerns or other issues entirely.

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A lot of investors are content to consider the mechanical and disease issues as incidents of the past, especially now that even modest dividend yields like Carnival’s (2.9%) and Royal’s (1.5%) are coveted. At least a dozen analysts recommend buying these shares now, and more recommend holding them. Both companies are generally optimistic about business in the coming year, although they complain that passengers are making more last-minute bookings instead of long-planned excursions.

But it’s hard to believe that such a raft of reports of passengers dying, stranded in stench and throwing up aboard numerous cruises won’t hurt business for a long time. As a commentator on Bloomberg TV said recently, “Why anyone goes on a cruise these days…I dunno.” You can get a 2.9% dividend yield to find out.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.


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