Posted by: Adrienne Carter on March 27, 2006
My sister can’t stand cruises—questions how anyone could think spending a week or so on a ship would be a vacation. Of course, her views are probably clouded by the six months she spent stationed on an aircraft carrier, floating around the Middle East on the U.S.S Truman (pic below). And the passengers aboard the Star Princess, the cruise ship that caught fire last week probably share her view now.
Certainly shareholders got scared that more people would skip ships; shares of Carnival Cruise Lines, which owns the Princess brand, fell 5% on Mar. 23 to $47.49 on the news. And now it’s way off its 52-week high of $56.14.
But something’s always whipping the cruise stocks around—whether it’s an outbreak of food poisoning, mechanical problems on a ship, or last week’s blaze—on fear that earnings will be shipwrecked. Luckily for Carnival that’s never the case. Despite these short-term blips, Carnival’s earnings “have been growing like a weed for 20 years,” says Tim Fidler, Ariel Fund’s Director of Research and Porfolio Manager of the Ariel Focus Fund, which owns Carnival.
Indeed, Carnival has more than 40% of the worldwide cruise market, an industry that's benefitting from the aging baby boomer population and a shortage of capacity. Fidler says the bulk of Carnival's earnings growth has come from expanding its fleet and not from increasing prices. And there's plenty of room to grow, particulary in Asia and Europe.
Does that make Carnival a good stock to own for the long term? With the high barriers to entry and some strong demographic winds, there's definitely a case to be made. And if you can buy in when there's bad news for the company, like now, that's all the better.