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Carnival Is Taking on Water, But Don’t Abandon Ship

Carnival Corp. (NYSE:CCL) was sinking around 6% on Tuesday thanks to lowered guidance, the latest chapter in a rather disappointing track record lately. Carnival stock is down 10% year-to-date and off almost 18% from its February highs thanks to some trouble with its ships and poor earnings.

However, with a 3% dividend yield and a lot of negativity priced in, there might be smooth sailing ahead. The cruise industry generally is doing quite well and Carnival stands to benefit, even if its current brand tarnish is admittedly a short-term drag on shares.

The trouble at Carnival hopefully doesn’t need much rehashing, since it had more than its share of bad press in the last several months. In February, the Carnival Triumph suffered an engine fire and stranded 4,200 passengers in squalid conditions. Then another ship lost power briefly at sea in April, prompting the company to pledge as much as $700 million in repairs and upgrades for its fleet.

All this after the Costa Concordia capsized off the Italian coast in 2012, resulting in the deaths of 32 people. The ship was owned by — you guessed it — Carnival Corp.

Oh yeah, and there also was an outbreak of norovirus on a voyage of operator Royal Caribbean Cruises (NYSE:RCL).

But CCL stock remained resilient, pushing up almost 33% from February 2012 to February 2013 despite some of the ugly news.

That was largely because of an industry-wide boom for cruise companies in the past year or so. Take a look at some of these numbers:

  • In February, Disney (NYSE:DIS) reported that its parks and resorts segment, which includes Disney Cruise Line, saw revenues grow by 10%. That’s a great sign for broader travel trends as well as the cruise business. Then in April, Q1 numbers showed big profit growth thanks to a 73% surge in operating income to Parks and Resorts on a 14% sales increase.
  • Royal Caribbean set a record for trips to Australia last year, up 34% from 2010. It’s pacing another record in 2013.
  • The U.K. Passenger Shipping Association reported a record 2012, with embarkations up 10% year-over-year for the fourth double-digit increase in the past seven years.
  • Bar Harbor, Maine, boasted a new record in 2012, too — and has bookings on track for yet another record in 2013.
  • Just this February, Carnival set a new record for the number of bookings in a singly week — 187,283 gross reservations across its 24-ship fleet.
  • The 2013 annual report from the Cruise Lines International Association pegs global passenger growth at 3% and North American passenger growth at more than 2% despite the spate of bad news. Also in the report, 68% of travel agents told CLIA that bookings should be comparable or better than 2012 numbers.

There are serious concerns, of course. Carnival just updated guidance for the second half of the year that showed reduced earnings forecasts despite strong bookings. Instead of flat profits, it now expects a 2% to 3% decline across late 2013, with full-year EPS between $1.45 to $1.65 instead of $1.80 to $2.10. Clearly there is an impact from recent repair costs and lower margins as CCL looks to build goodwill with passengers again.

But on the flip side, consider that Royal Caribbean just posted a 62% jump in Q1 profits and trounced expectations.

In other words, this is not a sinking industry. Yes, consumers aren’t feeling especially eager to spend, but one of the most affordable family vacations is a one-week cruise — particularly if you can drive to the port and not worry about airfare.

With a 3% dividend yield and the hopes of continued updrafts in the cruise market, dominant player Carnival seems like it’s getting close to bargain valuations. While the P/E is now more than 15 based on new fiscal 2013 forecasts, another 5% to 10% dip could make this a pretty attractive play. Carnival is soundly profitable and has taken most of its lumps already — another disaster at sea notwithstanding, of course.

Royal Caribbean also seems pretty fairly valued, with a P/E just under 15 based on FY2013 numbers, though a much more meager yield of just 1.2%. Disney is an option too, though clearly the media business and other operations make this less of a pure play on the cruise business.

I think Carnival will come back strong in the second half of 2013, and would consider CCL stock a “buy” under $31 a share. The current downtrend might last for a bit longer, but the cruise industry is here to stay — and so is Carnival.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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