UK Edition
Questor: although the shares are under water there is no need to abandon ship at Carnival
Questor share tip: the cruise operator’s strategic position remains strong and the stock looks cheap after the slide in the share price
It has hardly been smooth sailing since Questor first looked at Carnival last autumn, not least because the cruise ship operator has twice lowered profit forecasts.
In December the firm blamed higher fuel costs and currency movements, while last month it cited technical problems with its Carnival Vista ship and America’s latest travel restrictions with regard to Cuba.
While unfortunate (and regrettably unforeseen), none of these issues reflects any weakness in the company’s business model, competitive position or strategy, so the lacklustre share price could be an opportunity to at least average down your purchase price.
If anything, Carnival is patiently buttressing its competitive position through careful investment and fleet management. Over the past five years the firm has launched a dozen state-of-the-art ships and retired nine older, less efficient vessels.In addition, a further 17 new launches are scheduled for the next five years.
This explains why capital investment reached $3.7bn (£3bn) and cash conversion was relatively low last year, but the new ships should be more fuel efficient and reduce costs to give a boost to profit margins and also returns on capital.
Granted, the business is cyclical and if a global economic slowdown developed, or, worse, a recession, the earnings would be hit and the share price could start to sink again.
But the global cruise ship business is almost an oligopoly, with few major players of scale, and Carnival is therefore well placed to capitalise on the trend in consumer spending towards experiences and away from “stuff”.
- Read Questor’s rules of investment before you follow our tips
The shares peaked near £54 in 2017 and they have lurched lower ever since, not helped by the recent trading alerts. That peak put the shares on around 19 times forecast earnings, whereas they now trade on barely 10 times.
That huge fall in the multiple suggests there could be some value here, especially as the shares also offer a 4.5pc forecast yield.
The forecast dividend is also more than twice covered by earnings, if we go by consensus forecasts, and the company has also been buying back stock, so patient investors are at least being paid to wait until profit estimates gather some steam.
Research from Shore Capital, the broker, suggests that Carnival’s stock may be cheap on another metric.
It notes that Carnival’s “enterprise value” (market value minus cash plus debt) represents less than $170,000 per berth across its fleet, a level seen only three times since 2000: during the Second Gulf War of 2003, in the financial crisis of 2007-09 and again in 2012 when the Costa Concordia ran aground off the coast of Sicily.
There is no need to abandon ship at Carnival.
Questor: hold
Ticker: CCL
Share price at close: £35.58
Update: CVS Group
Veterinary services provider CVS has, unfortunately, proved a pretty mangy pick for this column over the past two years but last month’s trading update had a little more pedigree to it.
March’s interim results had met expectations and, better still, the latest statement suggested that sales would meet analysts’ forecasts and that earnings, on the group’s preferred metric, would comfortably beat them.
This is all a very nice change from the trio of profit warnings that had dogged the share price, thanks to a shortage of vets, which drove up costs, and a slow start at practices acquired in the Netherlands. A refinancing last year gave CVS some time to regroup and efforts to turn the business around, by reducing vacancy rates and cutting costs, have started to work.
The shares have doubled from their January low. They may now need a pause for breath, especially as they now trade on around 16 times forecast earnings for the year to June 2020.
A further update on July 26 should tell us more, while trends in the wider veterinary industry suggest there is a chance that a predator will appear – Mars Petcare bought Linnaeus and BC Partners acquired VetPartners in 2018.
It is still a long way back to our £13-plus purchase price, but CVS may be returning to health.
Questor: hold
Ticker: CVSG
Share price at close: 784p
Russ Mould is investment director at AJ Bell, the stockbroker. For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.