CCL, Carnival update

carnivel wreckccl ratings

Three weeks ago we suggested that this stock was a sell. No analyst agreed , of course, as is clear from the above insert. The reason was primarily economic having to do with the enormous capital investments to keep these things going. But there was also a dormant concern about the seaworthiness of these machines, this one (and two sister ships) is about twice the size of the Titanic that sank exactly 100 years ago. This time, as then, both ships met their end as a result of human error, a bit of bravado perhaps?

Concerning the stock, after the initial dip of 20% or so the stock could do just fine regardless of what has happened. The company earns 2.5 bln a year and uninsured damages from this event are not expected to be more than a few hundred million. But that is not necessarily all of it. A look at a similar event concerning the Andrea Doria suggests these events can be industry changing. In 1956 this very luxurious trans-Atlantic liner sank after a collision with the Stockholm in a fogbank of New York. That essentially ended the trans Atlantic passenger business which was ceded to the airlines. Ships like the United States, Ile de France etc. etc quickly became obsolete. Perhaps the cruise industry will survive this without any problem but we suspect that touring the islands on a 130,000 ton floating hotel that is inherently unstable is not the way of the future.

CCL Carnival Corporation

carnivak dreamccl 2011

Started in 1972 this company has worked it’s way up in the world of cruise line operators. In fact it has almost succeeded in monopolizing the business entirely. It owns quite a few “brands” that are easily recognizable even if you have never set foot on one of these boats in your life. The most prominent ones are Cunard of the “Queens” fame as well as the Titanic and HAL, Holland America line. At over 1000 feet and 130,000 tons these vessels are among the biggest ever built.  Buying one of these will set you back a little over 3/4 of a billion once everything is said and done. These ships are equipped with stabilizers so you barely notice that you are at sea, so much so that you might as well go to Las Vegas and have one drink too many to experience the same dream.

This is a capital intensive business. The liners have to sail close to capacity (3.500 passengers) just to break even. Nothing is left to chance  as every possible activity , no matter how seemingly innocent, is engineered to add to the bottom line. But Murphy’s Law presumable also applies to the cruise business and when it does this stock will be extremely vulnerable. A reasonable target would be around $7 or so but that could easily be exceeded. Royal Caribbean Cruises Ltd. (RCL) is another example, perhaps an even better one given the greater swings that it has displayed in the recent past. A nice example, by the way, of a triple top! The wave count is identical.

rcl 2011