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Questor: get on board Carnival, a well-run business immune from Amazon-style attack
Questor share tip: Carnival benefits from favourable demographic trends and cost advantages, while the shares have got much cheaper
When sharp falls in share prices have taken the FTSE 100 back to where it was 19 years ago it’s time to look for bargains among its constituents.
One that has caught the eye of one of Britain’s most experienced fund managers is Carnival, the giant American cruise company that retains a London listing by virtue of its takeover of P&O Princess Cruises in 2003.
Job Curtis, who has run the popular City of London Investment Trust for the past 27 years, told Questor that Carnival had many inherent advantages and the recent fall in its share price from highs of about £50 last month to £42.12 yesterday had made it even more attractive.
“Its first strength is that cruises are getting more popular,” he said. “They are cost-competitive with land-based holidays and because they tend to appeal to older people the ageing demographics of Western countries are an advantage, although Carnival has brands for all age groups.”
Curtis said some costs incurred by cruise operators were lower than those faced by rival holiday firms. “There is less tax to pay in mid-ocean and Carnival can recruit labour from anywhere, although it will want to maintain high standards among its crews,” he said.
Another of the firm’s virtues for investors is that there is no obvious way for its business to be attacked by “disrupters” in the way Amazon and others have done in many sectors.
The company has also built direct relationships with customers; intermediaries such as travel agents would take a slice of the profits. The direct approach can also help businesses such as Carnival to understand their customers better. This could lead, for example, to clients being targeted by specially tailored offers, Curtis said.
He said the biggest risk for the firm was ending up with too many ships if the market became oversupplied. But he pointed out that few shipyards were able to build cruise liners, so the company, and investors, would be able to see excess capacity in the pipeline before it started to affect prices and profit margins.
“Industry analysts think the current level of planned capacity can be used,” Curtis said. Carnival also operates a sophisticated “yield management” system that allows it to get the best prices for the cabins it offers.
In fact the firm has been increasing the number of cabins it can offer at a rate of about 4pc-5pc a year. It finances new ships partly from cash generated by its operations and partly by debt, although borrowings are not excessive at $8.8bn (£6.8bn) or about 1.6 times annual profits on an “Ebitda” basis.
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“You want to be in companies that are able to invest for growth, that can grow their asset base,” Curtis said.
However, he warned that the cruise market was cyclical and that unexpected events such as major terrorist attacks or wars could hit bookings. “Carnival is not completely defensive – it has risks,” he said. “It is well run but you can still get accidents.”
The Costa Concordia, which ran aground in Italy in 2012, was a Carnival ship, although the group’s other brands were not heavily affected. High oil prices can also hit profits.
Curtis said Carnival shares were trading at 14.3 times historic earnings but projected profit growth of 11pc would reduce this figure to 12.9 at the year end next month. If expectations of 9pc growth the following year are met the p/e ratio will fall to 11.8 at the current share price – a not unreasonable valuation for a stock that offers double-digit growth.
The yield is 3.3pc and the dividend, roughly twice covered by profits, is expected to rise by 6pc. This column advises readers to get on board while they can do so cheaply.
Questor says: buy
Ticker: CCL
Share price at close: £42.12
Update: BHP Billiton
We also asked Curtis about his current views on BHP Billiton, the miner tipped here in September last year as a result of his optimism about the stock. He said he was happy to hold and that, although the shares had risen by 5.8pc since our tip, on top of a 6pc yield, the valuation had actually fallen as a result of profit increases.
Questor says: hold
Ticker: BLT
Share price at close: £15.21
- Questor archive: telegraph.co.uk/questor