As Carnival (CCL) digs out from one of the most difficult wave seasons it has ever experienced, its revenue management team has adapted well to a fluid environment for demand of its offerings. Making the situation worse is the evolving consumer sentiment in Europe, which remains weak and prohibits pricing from experiencing the full growth potential we believe it can achieve year over year. All else equal, we do think cruise industry pricing will recover well in 2013, and will admittedly have easy comparables, likely helped by earlier bookings than we have experienced in 2012.
Despite sacrificing some pricing, we think the marketing programmes Carnival has implemented to support demand is imperative to get the business back on track. Even during these tough times, Carnival is forecasting operating cash flow of $3.2 billion with capital expenditures of $1.9 billion in 2012, leaving the firm with more than $1 billion in free cash flow, or with more than $0.5 billion (£320 million) after deducting the dividend payment. We think this remains a good company for income investors, with strong forward cash flow potential and a current dividend yield around 3%. We also believe the long-term potential remains significant as Carnival continues to grow and enter markets with low penetration such as South America, Japan and China.
We are maintaining our fair value estimate for now, but think there could be upside to our analysis once we gain more clarity on 2013.
The above is an excerpt from the Morningstar Research report on Carnival. Premium subscribers can read the full report, including fair value estimate and financial health assessment, here. Not a Premium member? Get instant access when you take a free 14-day trial.