Daily Gains Letter

Will Baby Boomers Steer the Long-Term Course of This Cruise Operator?

By for Daily Gains Letter |

DL_Feb_13_2013_JohnOver the years, technology has had to evolve to meet the changing needs of baby boomers. We can thank baby boomers for the invention of cell phones, SUVs, flat screen TVs, diaper services, “Barbie” dolls, and Rolling Stone magazine.

The baby boomer generation makes up roughly 26% of the U.S. population and controls the largest portion of the country’s disposable income. And for the next 17 years, 10,000 baby boomers will be heading off into retirement each day.

To meet this demand, the travel industry is going to have to change. The generation that gave us Woodstock is not going to be happy going on a cruise offering late-night bingo and Lawrence Welk dance marathons. Baby boomers are changing the face of the travel industry and, more specifically, the face of cruising.

For most baby boomers, retirement is about collecting experiences, not physical possessions. To meet this changing dynamic, cruise ships now offer a wider variety of entertainment and restaurants, elaborate exercise facilities, extensive casinos, and Internet cafes.

At the same time, boomers are a very heterogeneous group. Some boomers are retiring at 50, while others are heading back to college. There are “empty-nester” baby boomers who are downsizing, and there are boomers who have their kids still living in the basement. All of these factors affect spending and travel habits, from the duration of a trip to the level of luxury.

If cruise ship operators fail to identify and accommodate the unique needs of the fastest-growing demographic, they could find themselves in serious trouble. Boomers have money, and they’re not afraid to spend it on cruises that offer great value.

After taking a hit in 2008, the cruise line industry is bouncing back. With the economy showing signs of life and the first wave of boomers retiring, the cruise lines are trying to woo back customers. And for the next two decades, boomers will be one of the industry’s biggest, most consistent financial drivers.

The world’s #1 cruise operator, Carnival Corporation (NYSE/CCL) is a global cruise company and one of the largest vacation companies in the world. Carnival’s portfolio of cruise brands includes: Carnival Cruise Lines, Holland America Line, Princess Cruises, and Seabourn in North America; P&O Cruises (U.K.) and Cunard in the United Kingdom; AIDA Cruises in Germany; Costa Cruises in Southern Europe; Iberocruceros in Spain; and P&O Cruises (Australia) in Australia. Combined, Carnival’s vacation companies attract 10 million guests annually.

The company has a market cap of $30.0 billion, a forward price-to-earnings (P/E) ratio of 13.1, and $465 million in cash. Carnival also provides an annual dividend of 2.6%.

Carnival reported that fourth-quarter revenues slipped 3.1% year-over-year to $3.6 billion, exceeding analysts’ projections of $3.5 billion. Fourth-quarter net income fell 57.0% to $93.0 million, or $0.12 per share, from $217 million, or $0.28 per share, a year earlier. (Source: “Carnival Corporation & plc Reports Fourth Quarter and Full Year Earnings,” Carnival Corporation web site, December 20, 2012, last accessed February 12, 2013.)

Full-year revenue was off 2.6% at $15.4 billion. Net income for the period came in at $1.3 billion, or $1.67 per share. In 2011, the company reported net income of $1.9 billion, or $2.42 per share.

Additionally, since the start of the 2012 fiscal year, Carnival purchased 3.5 million of the company’s shares in the open market at a cost of $120 million.

Commenting on the results, company Chairman and CEO Micky Arison said, “As a result of the Costa Concordia tragedy in January (2012), the past year has been the most challenging in our company’s history. However, we were able to maintain full year 2012 net revenue yields (excluding Costa) in line with the prior year. In addition, we drove down net cruise costs, excluding fuel, slightly and fuel consumption by four percent.” (Source: Ibid.)

During the fourth quarter, the company announced it had reached an agreement for the construction of two new cruise ships—a 2,660-passenger ship for its Holland America Line brand to be delivered in 2015, and a 4,000-passenger vessel for its Carnival Cruise Lines brand to be delivered in 2016. Both are the largest ships ever built for those brands.

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Chart courtesy of www.StockCharts.com

Since bottoming in November 2008, Carnival’s share price is currently trading at a 182% increase. In January 2012, the company’s share price took a hit following the Costa Concordia disaster in Italy. Thanks to Carnival’s strong global presence, the company’s share price rebounded shortly thereafter. In May, the company’s 50-day moving average (MA) crossed above its 200-day MA—a bullish indicator—and was in a steady uptrend for much of the year. In November, the company began trading in a tight range until it recently found tested support near $38.50.

Looking forward, Arison stated, “We remain well positioned for a recovery in 2013. We continue to focus on a measured growth strategy through the introduction of two to three new ships per year and the development of emerging cruise markets in Asia.” (Source: Ibid.)

While the company’s European brands continue to suffer from a “deteriorating environment,” Carnival expects its North American business and Costa to benefit from a recovery in ticket prices and occupancy.

The company forecasts full-year 2013 non-Generally Accepted Accounting Principles (GAAP) diluted earnings per share to be in the range of $2.20–$2.40, compared to fiscal 2012 non-GAAP diluted earnings of $1.88 per share.

During 2013, the company will introduce two new ships, the 2,192-passenger “AIDAstella,” which is scheduled for delivery in March, and the 3,560-passenger “Royal Princess,” which is scheduled for delivery in May.

Based on 2013 guidance, the company estimates that cash from operations will reach $3.3 billion for the year, while capital commitments will be just $2.0 billion. As a result, Carnival anticipates significant free cash flow in 2013, which it intends to continue to return to shareholders.

Longer term, Carnival has been recovering from the Costa disaster with the introduction of new ships, increased on-board revenue yields, and booking volume. Further, the company continues to strengthen its balance sheet with cost-cutting measures.

Due to the company’s size, investors are not likely to experience long-term share price depreciation on the heels of individual negative events—such as the Costa Concordia sinking. As the world’s #1 cruise operator, Carnival is a financially solid company with an enormous international footprint.

Over the last five years, the company’s share price has recovered nicely. And, with a new fleet designed to meet the growing needs of its ever evolving customer base, Carnival continues to be a great company with tremendous long-term growth potential.

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