STOCK WATCH


More Friendly Waters for Cruise Lines?

Bob Frick

Falling prices for Caribbean cruises were a drag on profits for Carnival and Royal Caribbean. But now their stocks may be gathering speed.



There's a reason pirates didn't prowl the Bering Sea: A relative lack of booty. Instead, they focused their efforts in the booty-rich Caribbean, and today cruise lines concentrate their seagoing hotels in those warm waters for the same reason. But because of softening prices for Caribbean voyages the past couple of years, this segment of the cruise operators' businesses has been a bit chilly. Now, however, that trend may be reversing course.

This isn't to say that all the news has been bad for cruise-line companies. Pricing and revenues from European and Alaskan cruises have strengthened since 2005, and industry leader Carnival (symbol CCL) has seen its revenues rise from $4.3 billion for the fiscal year that ended November, 2004, to $5 billion for the year ended November 2006.

But the Caribbean is the largest destination for Carnival and its chief rival, Royal Caribbean (RCL), and weakness there puts a sea-anchor drag on profits. Behind the problems are overcapacity and the likes of Bonnie, Charley, Frances, Ivan and Jeanne -- a handful of the hurricanes that wreaked havoc in 2004. Higher fuel prices have also cut into profit margins.

Analyst Joseph Hovorka of Raymond James says he has the first sign that cruise prices may be firming up. While his March survey of travel agents showed a flattening of prices after a long fall, his May analysis showed a slight up tick. This "modest improvement" could be the start of a trend and is good news for shareholders because, as Hovorka has demonstrated, there has been a significant correlation between cruise prices and the operators' stock prices over the past five years. Combine the pricing change with an increase in trips being booked -- including trips in Europe and Alaska -- and by the end of this year the cruise industry could be operating at full speed ahead.

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Hovorka upgraded Carnival from outperform to strong buy on June 5 (and upgraded Royal Caribbean from neutral to outperform). He points out that since 2001, Carnival's stock has traded, on average, at 17.5 times the next 12 months' earnings. After climbing 1% on June 15, to $51.26, the stock sells at a relatively cheap 15.5 times Hovorka's earnings estimate of $3.28 for the fiscal year ending November 2008.




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