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Ahead of the Bell: Carnival Cruise Lines

The Associated Press

NEW YORK (AP) -- Carnival Cruise Lines' $300 million investment in emergency generators, fire safety equipment and improved engine rooms should create an entry point for investors to buy shares of its parent company, an analyst told investors.

Stifel Nicolaus Capital Markets analyst Steven Wieczynski held his "Buy" rating and $43 target price for Doral, Fla.-based Carnival Corp., and wrote in a note to investors Wednesday that improving demand for cruise ship services should keep Carnival's free cash flow going in the long term.

Carnival Cruise Lines announced the investment on Wednesday to improve all 24 of its ships. The investment could help the brand begin rebounding from a wave of bad publicity that began in February, when an engine fire knocked out power on the Carnival Triumph, which was sailing out of Galveston, Texas. Passengers endured filthy conditions as the Triumph was towed to Mobile, Ala., resurrecting stories of a similar incident from 2010 aboard the Carnival Splendor. Cruise sellers say prices for Carnival cruises have dropped as minor incidents with other Carnival ships have also made headlines.

"We continue to believe current levels present investors with an attractive entry point into an above-average three- to five-year total return story," Wieczynski wrote. He added that "recent one-off events" are likely to cloud the company's results in the short term, but cash flow should keep going in the long term.

Shares of Carnival were up 76 cents, or 2.3 percent, to $33.98, in premarket trading Thursday. In the past year they have traded in a range of $30.65 to $39.95. Share prices fell after the Carnival Triumph incident.

Carnival said the first phase of improvements involves installing an additional emergency generator on every ship to ensure operation of safety equipment and services like plumbing, fresh water and elevators in a power loss. The extra temporary generators will eventually be replaced by permanent generators.

Carnival is also installing high-pressure upgraded water mist systems on all ships to improve fire safety. All of those measures will be completed in 18 months, Carnival CEO Gerry Cahill said in a phone call Wednesday.

Final upgrades will take longer, requiring drydocking to reconfigure cables that connect each ship's two engine rooms, among other measures. That way, if one engine room goes out, the other will be unaffected.

Carnival Cruise Line's parent company, Carnival Corp., owns a total of 10 cruise lines, including Princess, Holland America and Cunard. The company said all 101 ships from all brands will be assessed to see if similar upgrades are warranted. Carnival Corp. also owns Costa Cruises, whose Costa Concordia ship sank in 2012, killing 32 people.

The total cost of the upgrades is estimated at $600 million to $700 million over three years, Wieczynski wrote. Carnival had earlier said it was looking at the capital upgrades but couldn't quantify how much they would cost. That "didn't sit well with investors," Wieczynski wrote.