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Sinking Cruise to Dent Carnival '12

Zacks Equity Research

Carnival Corporation’s (NYSE:CCL - News) cruise ship Costa Concordia, carrying more than 4,000 passengers recently ran aground at Italy’s west coast, jeopardizing the lives of passengers onboard and the company’s reputation. Carnival estimates the disaster, which reportedly caused 11 deaths and left more than 20 missing so far, to hurt full fiscal 2012 earnings by around $85–$95 million or 11–12 cents per share.

The company also apprehends several other costs that are not in at this time. Prior to this disaster, management had projected full fiscal 2012 non-GAAP earnings in the range of $2.55–$2.85 per share. Carnival has declared payment $40 million deductibles on insurance to cover the damage to the vessel and third-party personal injury cover. The vessel is expected to be out of service for the remainder of the current fiscal year if not longer.

As a single economic entity, Carnival Corporation & Carnival plc. (NYSE:CUK - News) (earlier P&O Princess Cruises) forms the largest cruise operator in the world. Costa Cruises Group, taking care of 15 cruise ships, is one of the main operating companies in the Carnival group, with executive control in Europe. The company is responsible for the operation of Costa Cruises in Italy, AIDA Cruises in Germany and Ibero Cruises in Spain.

More than a year ago, Carnival faced another calamity when a fire broke out in the engine room of the Carnival Splendor, off the coast of Mexico. The accident hurt fourth quarter 2010 earnings by about 7 cents a share. However, the disaster was much smaller in scale and did not put lives at risk.

Carnival Corporation & plc is traded on both the New York and London Stock Exchanges. On Monday, Carnival shares declined 16.5% to 1,878 pence in London trading. The company, however, did not trade that day in the U.S. stock exchange owing to a public holiday. On Tuesday, the company's shares fell 13.7% to $29.60 in the U.S. trading.

We believe the Concordia disaster is historical and will hit the industry as a whole in the near term. As we know, the cruise industry does maximum business in the wave season between January and March. The recent tragedy could shatter passengers’ confidence and result in subdued bookings. The timing of the catastrophe is bound to take a toll on Carnival’s busiest booking season this year.

However, we think that in due course of time, Carnival along with the entire industry will return to normalcy. Carnival, which competes with Royal Caribbean Cruises Ltd. (NYSE:RCL - News), currently retains a Zacks #5 Rank (short-term Strong Sell rating). We reiterate our long-term Neutral recommendation.

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