Carnival (CCL) is the largest company in the cruise industry, operating 10 global brands with more than 100 ships in service and passenger capacity of more than 200,000, allowing it to reach a diverse group of consumers in a lightly penetrated vacation segment. Efficient scale, the lowest unit costs in the industry, and intangible brand assets provide the company with a narrow economic moat.
Carnival's market is underpenetrated, with less than 4% of the domestic market ever having cruised. With low domestic penetration rates and even lower international recognition, less than 3% in Europe, upside potential remains significant.
The repositioning and deployment of ships to faster-growing and underrepresented regions like Asia-Pacific should help balance supply in high-capacity regions like the Caribbean, which should provide for more lucrative pricing strategies globally.
In our opinion, Carnival has the best ability to capitalise on these underserved international markets, thanks to its global reach and tailored fleet.
Domestically, the ageing population remains key regarding the supply and demand imbalance in the cruise industry, in our view. This segment will drive demand and create a disconnect between the demand in the market and the supply of berths for at least the next 10 years as the 65-and-older demographic grows faster than overall cruise industry capacity. The stable employment situation should also boost lower-income consumers' willingness to spend, helping the namesake Carnival brand continue to deliver double-digit returns on invested capital, with the firm surpassing our weighted average cost of capital estimate in 2019.
The firm is set to receive 18 ships between 2018 and 2022, boosting supply growth over the next five years. In our opinion, it can still lower costs through improved procurement expenses and better fuel efficiency; ships using liquefied natural gas come into service in 2018. It can also improve revenue via the revenue management optimizer it implemented across six brands in 2016, which should help improve earnings before tax margins to 32% from below 30% over the next decade.
